28 October 2015 Asia Pacific/China Equity Research Thematic Research (Technology - Internet/New Media CN (Asia))
Young China Research Analysts THEME
Vincent Chan 852 2101 6568 [email protected] Lonely kids ruling cyberspace Anson Huang 852 2101 6823 [email protected] Figure 1: The fast growing "Young China" 92.6 Baiding Rong 100 852 2101 6703 80 63.7 [email protected] 53.4 60 47.7 Bin Wang 41.2 30.3 852 2101 6702 40 27.9 19.4 16.0 [email protected] 20
David Hao 0
Online VideoOnline
Internet AdvertisingInternet Industry Sports
O2O Food DeliveryFoodO2O
Groupbuy
Online ShoppingOnline TicketingOnline
Robot OwnershipRobot Environment 852 2101 7310 Investment [email protected] Dick Wei 852 2101 7339 [email protected] Evan Zhou 852 2101 6745 CAGR% (14-17) [email protected] Source: Company data, Credit Suisse estimates Joy Zhang 852 2101 7083 We studied the characteristics of "post 90s" Chinese and their implication on [email protected] various aspects of the Chinese economy: Kevin Yin 852 2101 7655 ■ The "post 90s" generation. There are three distinguished characteristics of [email protected] this generation: (1) it is the first generation fully affected by the "One Child Kyna Wong Policy"; (2) it is the first generation to benefit from widening education 852 2101 6950 [email protected] opportunities, with over 85% of them attending high school and almost 40%
Mark Mao with tertiary education (based on 2014 data); and (3) it is the first generation 852 2101 6710 to grow up with the internet, so they are much more willing to express their [email protected] opinion or share information in cyberspace. Sam Li 852 2101 6775 ■ What does this mean for China? They are quite at home with e-commerce [email protected] (both goods and service) and internet finance due to their familiarity with Sophie Chiu cyberspace, and they tend to demand more customised products (like cars) 852 2101 7657 [email protected] and services (travel). Also, due to the demographic change and education Steven Zhu advancement, automation and robotics will be key trends. Further, with their 852 2101 6535 rising social consciousness, environmental protection will be another key [email protected] development. Trina Chen 852 2101 7031 ■ Beneficiaries of "Young China". We believe the following stocks will be [email protected] key beneficiaries of the "Young China" theme: JD.com, Anta Sports, CITS, Haitian Flavouring, CAR, Alibaba, Vipshop, 58.com, Wanda Cinema, Wisdom, Ctrip, Geely, Harmony Auto, Han's Laser and BE Water.
ERRATUM: This report supersedes our report dated 28 October which included Dongjiang as a key beneficiary / top pick (pages 2 and 114). (Dongjiang entered trading suspension on 27 October 2015.)
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access
28 October 2015 Focus charts and table
Figure 2: Number of new born babies Figure 3: Education level of Chinese youth
35 (Mn new born babies per annum) 100 (% of corresponding age group) 30 26.3 80 24.9 23.8 25 21.9 21.1 21.3 20.3 19.2 19.8 60 20 18.3 16.6 15.9 16.3 15 40
10 20 5 0
0
70 55 60 65 75 80 85 90 95 00 05 10
50 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
------
74 59 64 69 79 84 89 94 99 04 09 14 54 Senior High Schooling Higher Education
Source: CEIC Source: CEIC
Figure 4: Purpose of using social media Figure 5: Ageing China leads to the rise of robots 80 450,000 5.0% Japan old Others 5.8% Japan robot 400,000 70 dependency ratio 1.6% Post 80s Post 90s ownership Interaction with Celebrities 5.5% 350,000 60 17.7% Life Recording 25.1% Korea old 300,000 50 27.1% dependency ratio Getting Information 25.5% 250,000 18.2% 40 Expressing Opinion 29.2% China robot ownership 200,000 24.8% 30 Information Sharing 31.4% China old 150,000 39.5% 20 Korea robot dependency ratio Knowing the Society 38.5% 100,000 ownership 39.0% Time Killing 40.8% 10 50,000 28.9% Circle Expansion 40.9% - - 40.8% 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019 2022 2025 2028 2031 2034 2037 2040 2043 2046 2049 Friend Communication 53.6% Japan old age dependency China old age dependency Korea old age dependency 0% 10% 20% 30% 40% 50% 60% Japan robot ownership (RHS) China robot ownership (RHS) Korea robot ownership (RHS) Source: "2014 China Post-90s Research Report" published by Source: IFR, World Bank EnfoDesk & Tencent QQ
Figure 6: Beneficiaries of "Young China" Name Ticker Rec Price TP % to TP P/E (x) EPS growth (%) ROE (%) (loc) (loc) 2015 2016 2015 2016 2015 JD.com JD.OQ O 28 40 45 -111 545 -78 -120 -6 Anta Sports 2020.HK O 22 22.5 4 22 20 17 14 24 CITS 601888.SS O 54 68 25 34 30 5 14 15 Haitian Flavouring 603288.SS O 34 41 20 37 30 21 21 31 CAR 0699.HK O 14 22 62 23 14 102 70 19 Alibaba BABA.N O 79 98 23 36 31 18 18 40 Vipshop VIPS.N O 20 25 23 36 24 74 53 61 58.com WUBA.N O 51 66 29 -18 -39 -965 -54 -34 Wanda Cinema 002739.SZ O 97 122 26 88 49 -31 80 34 Wisdom 1661.HK O 4 5.2 31 16 12 21 28 26 Ctrip CTRP.OQ O 89 109 23 111 54 11 104 9 Geely 0175.HK O 4 5.7 39 10 7 104 41 16 Harmony Auto 3836.HK O 5 8.8 67 11 8 -21 38 15 Han's Laser 002008.SZ O 26 33 29 41 29 1 44 11 BE Water 0371.HK O 6 8 26 25 20 24 25 14 Note: Prices as of 27 Oct 2015. O = Outperform Source: Company data, Credit Suisse estimates
Young China 2 28 October 2015 Lonely kids ruling cyberspace The "post 90s" generation The "post 90s" generation (people born in the 1990s) is the first generation of Chinese to The "post 90s" generation feel the full impact of the One Child Policy, and they are growing up in a prosperous (people born in the 1990s) is environment. Compared to previous generations, the "post 90s" benefited from widening the generation most education opportunities, with over 85% of them attending high school and almost 40% with receptive to new technology tertiary education (based on 2014 data). Another distinctive feature of this generation is the proliferation of the internet: they are the most receptive generation to new technology. Thus, this generation is clearly much more comfortable with cyberspace—no matter whether they are shopping there, making friends there or speaking their minds there. What does this mean for China? Life and consumption activities and the "post 90s" generation have been linked with the Life and consumption internet. About 60% of the "post 90s" spend more than three hours per day surfing the activities and the "post 90s" internet via smartphones, and can handle most of their daily tasks through about 50 apps generation have been linked on their mobile phones. We think they probably are the first generation of Chinese who with the internet would be willing to spend most of their money on services rather than goods. In this report, we discuss the relationship of internet with various business sectors from our analysts, as well as some emerging consumer trends. Specifically, they are quite at home with e- commerce (both goods and services) and internet finance due to their familiarity with cyberspace, and they tend to demand more customised products (like cars) and services (travel). Also, due to the demographic change and advanced education, automation and robotics will be key trends. Also, given their rising social consciousness, environmental protection will be another key development. Detailed comments on individual sectors will be shown from pages 21 t0 114. Beneficiaries of "Young China" We believe the following stocks will be key beneficiaries of the "Young China" theme:
Figure 7: Beneficiaries of "Young China" Name Rec Reason JD.com O JD is China's second-largest B2C company, well positioned to benefit from Chinese young adults' consumption behaviour change and robust sector development. Anta Sports O Anta, the No.1 domestic sportswear brand, rides on the trend of lifestyle change and younger consumer mix. CITS O CITS is the only nationally licensed duty-free store (DFS) operator in China. Haitian Flavouring O Haitian is the largest soy sauce company in China, with a 16% market share. CAR O CAR is the largest rental company in China with over 30% market share, benefiting from robust growth in the China auto rental market. Alibaba O Alibaba offers attractive valuation. It benefits from sustainable e-commerce market growth in China. Vipshop O Vipshop adopts a unique B2C merchandising model to collaborate with overseas brands in its global sales business. 58.com O Top pick in O2O services e-commerce, as we expect early cost synergies would start to emerge. Wanda Cinema O Wanda Group is vertically integrated with a strong presence across China's box-office value chain. It has also developed a clear roadmap and has unmatched highest operating efficiency among peers. Wisdom O The company is currently the largest footrace organiser in China, and has also developed its self-owned IP events. Ctrip O As the largest OTA in China, Ctrip is the top choice as the China partner for all major foreign players. Geely O Geely is well positioned to capture the fast evolving demand on upgrading technology & product. Harmony Auto O Harmony New Energy Auto, a leading luxury dealer group in China, is transforming into a new energy vehicle (NEV) maker. Han's Laser O Han's Laser is the world's largest laser marking equipment manufacturer with 40% market share. BE Water O We are incrementally more positive on BEW and believe it will be one of key beneficiaries of the 13th Five Year Plan. Source: Company data, Credit Suisse estimates
Young China 3 28 October 2015 The "post 90s" generation "Young China" can mean many things. First and most importantly, it refers to the young "Young China" refers to the Chinese today and their distinct characteristics, which could influence their decision on young Chinese and their jobs and consumption. Second, the current status of young Chinese will in turn affect the influence on the development development of Chinese industries. So, we will start our discussion of young Chinese first. of Chinese industries Who are the "post 90s" (九十后, people born in the 1990s), and how do they compare to Some truth in the social an older generation, such as the "post 80s"? The most common descriptions of them, survey but need to be based on social surveys, particularly compared with the "post 80s" generation, would be careful about such lonely, individualistic, outspoken, spending a lot of time at home in front of a computer (宅), comparisons creative, couldn't care less about job security, irresponsible and apolitical. There is probably some truth to these claims. However, we should also be careful about such comparisons. The problem is that most of these surveys are asking the "post 90s" and the "post 80s" generations in the same survey, i.e., comparing the view of a person aged 15- 25 (the age of the "post 90s" now) and another aged 25-35. Naturally, their opinion will be very different simply because of the age difference. Frankly, any child in their late 10s/early 20s, born in a relatively stable and prosperous environment, while loved by their parents, will feel somewhat lonely, a bit dreamy in their career/personal choices and somehow individualistic/"irresponsible", no matter where or when they were born. Indeed, ten years ago, there were similar comments on the "post 80s", and ten years later, similar comments will be made on the "post 00s".
Figure 8: How do the "post 90s" label themselves?
35 30.5 30 25.6 24.2 25 19.0 18.7 17.1 20 16.9 16.6 15.9 15.6 15 10 5
0
"Zhai"*
Striving for mission for Striving Humor
Natural
Reliable Practical
Stubborn
Diligent Flexible Independent
* "Zhai" = 宅, love to stay at home. Source: Peking University Marketing & Media Research 2015 While the attitude of the "post 90s" may not be that much different from people born ten The "post 90s" are growing years ago at the same age, the external environment they face is rather different. Largely up in a very prosperous due to the full implementation of the "One Child Policy" from the early 1990s, the number environment due to the of new born babies per annum peaked during the five-year period of 1985-89, and started strong growth of the to decline afterwards. The number of new born babies in 1995-99 would be 17% lower Chinese economy from than the level of 1985-89, and it only stabilised in the last few years. Therefore, most of the early 1990s onwards "post 90s", particularly those born in cities, are the only child in the family. Also, the
Chinese economy enjoyed very strong growth from the early 1990s (particularly after China's WTO entry), so the "post 90s" grew up in a very prosperous environment, and as single children under the loving care of their parents. Having said that, this is largely a continuation of the trend for the "post 80s", i.e. single child born in a family with rising prosperity, but taken to a higher level.
Young China 4 28 October 2015
Figure 9: Number of new born babies 35 (Mn new born babies per annum)
30 26.3 24.9 23.8 25 21.9 21.1 21.3 20.3 19.2 19.8 20 18.3 16.6 15.9 16.3 15
10
5
0
70 50 55 60 65 75 80 85 90 95 00 05 10
------
74 54 59 64 69 79 84 89 94 99 04 09 14
Source: CEIC The education level of this generation is also significantly better than previous generations, Education level is better with over 80% of youth attending senior high school and almost 40% in higher education.
Figure 10: Education level of Chinese youth 100 (% of corresponding age group) 80
60
40
20
0 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Senior High Schooling Higher Education
Source: CEIC Apart from having more resources and support from their family, another distinctive feature Internet proliferation is of this generation is the proliferation of the internet. The number of internet and mobile another distinctive feature of internet users took off in China from around ten years ago, the time when this generation this generation was in high school and extremely receptive to new technology.
Young China 5 28 October 2015
Figure 11: Internet users took off around 10 years ago 800 (Million people) 700 600 500 400 300 200 100 0 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13
Internet Mobile Internet
Source: CEIC Compared to previous generations, this generation is clearly much more comfortable with This generation has a larger cyberspace no matter whether it is shopping there, making friends there or speaking their influence on the trend of minds there. In a survey of the attitude of "post 90s" vs. "post 80s", the "post 90s" are cyberspace much more active in meeting old or new friends ("Circle Expansion" and "Friend Communication") and expressing themselves in cyberspace ("Expressing Opinion", "Life Recording" and "Information Sharing") compared to "post 80s", while the two groups are rather similar in receiving information from social media ("Getting Information" and "Knowing the Society"). It is not unfair to say that the ability of this generation in influencing the trend of cyberspace is significantly larger than previous generations.
Figure 12: Purpose of using social media
5.0% Others 5.8% 1.6% Post 80s Post 90s Interation with Celebrities 5.5% 17.7% Life Recording 25.1% 27.1% Getting Information 25.5% 18.2% Expressing Opinion 29.2% 24.8% Information Sharing 31.4% 39.5% Knowing the Society 38.5% 39.0% Time Killing 40.8% 28.9% Circle Expansion 40.9% 40.8% Friend Communication 53.6% 0% 10% 20% 30% 40% 50% 60%
Source: "2014 China Post-90s Research Report" published by EnfoDesk & Tencent QQ Therefore, in this report of Young China our analysts will focus on discussing the Relationship of internet with relationship of the internet with various business sectors, as well as some emerging various business sectors consumer trends (which themselves are related to development of internet and e- and some emerging commerce). Also, the reducing labour force due to a declining birth rate, along with them consumer trends are receiving a better education, has triggered the development of industry automation/ discussed in this report robotics in China, which we will also discuss in this report. Finally, we will discuss the changing social value towards environmental protection in this note.
Young China 6 28 October 2015 What does this mean for China? Young Chinese consumers As mentioned above, the life and consumption activities and the "post 90s" generation The "post 90s" probably are have been linked with internet. About 60% of the "post 90s" spend more than three hours the first generation who every day on the internet via smartphones, and can handle most of their daily tasks would be willing to spend through about 30 apps on their mobile phones. They check their mobile phone every 15 most of their money on minutes, i.e. they will check their phone four times during a one-hour meal. That's their services rather than goods lifestyle, and whether a restaurant provides free Wi-Fi thus becomes a critical criterion for them. They probably are the first generation of Chinese who would be willing to spend most of their money on services rather than goods. For example, according to a survey by Qy.com, 60% of mainland outbound tourists are aged 21-30, i.e., born between 1985 and 1995, and going to a movie is a new consumption trend for the young Chinese (over 50% of China's movie audience is below 30 years old). They would also be much more open to a sharing economy.
Figure 13: Online shopping penetration breakdown by category (2013 vs 2014)
80% 75.6% 75.3% 2013 2014 70%
60%
50% 45.1% 43.3%
40% 37.5% 34.9% 34.4% 32.7% 33.1% 30.6% 30% 26.6% 25.9% 25.4% 24.9%25.7% 22.7% 22.4% 24.1% 18.7% 20% 16.6% 16.8% 18.0% 16.3% 15.4%15.3% 14.5% 12.9% 12.7% 12.2% 10% 7.3%
0% Clothing, 3C Grocery Prepaid Home Cosmetics F&B Bag Book & Flight & Movie Catering Sports Baby Gold & shoes & card appliance Video hotel ticket goods products Jewelry hats booking Source: CNNIC Who can win the heart of this generation of "keyboard warriors"? Our consumer analysts Winner of this trend would believe that the long-term winners would be the ones which are able to: (1) build a be JD.com, Anta, CITS, compelling 'young' brand with innovative designs, (2) provide a pleasant consumption Haitian and CAR experience, and (3) benefit from a business model that leverages the "sharing economy". The top picks of our China consumer team on these trends are: JD.com, Anta, CITS, Haitian and CAR. E-commerce for the customers born to be digital As mentioned above, China's "post 90s" are naturally adaptive to the fast evolving "Post 90s" are more digitised world. According to a CNNIC report, there were 277 mn "post 90s" internet users adaptive to a digitised world in China by end-2014, and internet penetration of this generation is 79.6%—31.7% higher than the national average of 27.9%.
Young China 7 28 October 2015
Figure 14: Adoption of e-commerce-related APPs among different user groups 80% 73.5%
70% 65.5% 65.6% 60.7% 60% 57.0% 58.3% 56.9% 54.9% 55.7% 52.3% 48.8% 50% 46.9% 44.3% 43.7% 43.5% 41.8% 39.4% 40% 34.2% 33.3% 32.7% 32.6% 30% 26.9% 26.6% 23.3% 20.1% 17.7% 20% 15.7% 12.3% 12.1% 12.1% 9.5%8.7% 10% 8.0% 8.2% 5.1% 2.7% 0% Primary school student High school student College student Non-student Post-90s user Total internet user Online Shopping Groupbuy Travel Online payment Internet banking Internet finance
Source: CNNIC Physical goods e-commerce. Among the e-commerce related APPs, online shopping Alibaba is our top pick in APPs has the highest adoption rate, followed by online payment and internet banking, with physical goods e-commerce Taobao and Tmall their favoured shopping sites. According to the report, young online shoppers know how to differentiate their needs by seeking customised items on Taobao and buying standardised goods on Tmall. Among physical goods e-commerce, cross- border e-commerce enjoys very strong growth and is a front runner in consumption upgrades, for three reasons: (1) reasonable price (has a lot to do with China's tax arrangement), (2) trustworthy quality as goods are directly imported and website run by credible vendors; and (3) exclusive/new products may not be available in the domestic market. According to Nielsen, the top five cross-border purchase categories in 2013 are clothing & footwear (Rmb22 bn), health and beauty products (Rmb17.6 bn), computer hardware (Rmb13.5 bn), watches and jewellery (Rmb13.1 bn) and personal electronics (Rmb12.9 bn). Our internet team's top pick in physical goods e-commerce is Alibaba, given its attractive valuation and opportunity in its e-commerce ecosystem.
Figure 15: Listed e-commerce companies' overseas online shopping exposure Total GMV (US$ bn) Overseas exposure Name Delegated B2C model 2014 2015E 2015E Long-term Tmall Marketplace (Direct shipping + Bonded Area) 366.8 474.9 1-5% 10~15% JD Marketplace (Direct shipping) 42.0 71.1 1-5% 10~15% Vipshop Merchandising (Bonded Area) 6.3 11.3 2-3% 5% Jumei Marketplace (Direct shipping) + Merchandising (Bonded Area) 1.1 1.5 30-40% 40-50% NetEase Kaola Merchandising (Bonded Area) 0 1.3 100% 100% Dangdang n.a 2.3 2.9 1-2% 5% Source: Company data, Credit Suisse estimates O2O food delivery. Among various O2O services, our internet analysts observed strong 58.com is our top pick in online adoption in restaurant catering, food delivery, ticketing, transportation and life service e-commerce services categories. The business model of O2O started in the group buying era, but started to evolve in 2011-12 when mobile-enabled infrastructure started to build up along with the challenges of newcomers such as Uber. This new transactional-oriented platform offered the following key advantages to young customers: (1) dis-intermediation of the traditional intermediary agencies and directly connects consumers and service providers which helps to bring the most competitive products to consumers with the best price; (2) efficiency enhancement for both customers and service providers with real-time availability matching at the lowest granularity; and (3) significant service quality improvement with the mobile-enabled evaluation and feedback loop. Among O2O services, online food delivery is one of the most popular items. According to iResearch's survey, 56.4% of the 19-24 group has used O2O food delivery services, higher than the 50% of other age group. The strong growth of O2O food delivery is due to the following reasons: (1) rising disposable
Young China 8 28 October 2015 incomes, a fast pace of life and lower desire to cook at home has led to a major change in people's lifestyles; (2) convenience of O2O food delivery through mobile internet; (3) demand from restaurants to increase order volume subject to the constraints of physical space, location and business hours of restaurants; and (4) strong investment funding support allows O2O food ordering providers to expand their service networks and establish in-house logistics teams which further improve the service quality. Our top pick in O2O service e-commerce is 58.com, as we expect early cost synergies would start to emerge.
Figure 16: China O2O food delivery market size forecast 60 19.2% 20% 16.3% 12.8% 50 9.8% 6.7% 12.4% 10% 10.7% 3.5% 8.4% 1.6% 2.2% 40 5.9% 41.75 3.4% 0% 0.6% 1.5% 0.3% 29.51 30
-10% 20 18.23
9.51 -20% 10 4.23 1.44 0.15 0.46 0 -30% 2010 2011 2012 2013 2014 2015E 2016E 2017E
O2O food delivery market size (Rmb Bn) % Penetration in total food delivery market O2O food delivery as % total O2O catering market
Source: iResearch, Credit Suisse estimates New media There are two major trends of new media worth our attention. O2O online ticketing. In 1H15, online ticketing overtook offline ticket sales as the No.1 Wanda Cinema should be channel, with 66.5% of total box office. Our media analyst expects online ticketing to the key beneficiary of the account for 80% of domestic movie box office by 2020. The growth of online ticketing also O2O online ticketing trend stimulates the expansion of China's box office movies by the following means: (1) convenience in the purchasing process; (2) subsidy to regular ticket prices; (3) enables seat selection in advance to enhance the viewer experience; and (4) cultivates a movie watching habit. The movie ticket subsidy is a major concern, but we do not think that it will be removed in the near future as the market is still rather fragmented and a lot of big players want to enter this space due to its ability to attract customers of other O2O categories. In the long run, we do not think the elimination of subsidy will have a big impact on both the box office and online ticketing platforms, as disposable income is rising, China's movie ticket price is still lower than its neighbour and movie watching has become a major form of entertainment. Key beneficiaries should be cinema chains such as Wanda Cinema.
Young China 9 28 October 2015
Figure 17: Summary of online ticketing business models Business model Major players Pros and cons Groupbuy Baidu Nuomi, Dianping These platforms typically offer both Groupbuy and online seat selection; for Groupbuy, customers can buy tickets in advance without confirming the movie and show time. With mature O2O and Groupbuy business model, these platforms have established a customer base and offline sales resources; other services offered on their websites can also bring in movie tickets traffic. Online ticket Gewara, Maoyan, As specialised platforms, these companies are good at online and offline marketing and selection Komovie, Wangpiao, promotional events' organisation. only Spider, Maizuo Within the movie watcher community, they enjoy a high level of customer stickiness. e-commerce Taobao Movie, JD.com Movie ticket is one category on these e-commerce platforms, therefore, they get the traffic from the e-commerce website itself. Many customers have downloaded their mobile application and registered as users previously for their e-commerce services. These platforms also have mature and trustworthy payment systems in place. However, they might not have as many resources and experience for movie ticket discounts and offline collaboration. Social and search Wepiao, Wepiao gets traffic from two of the largest social applications in China—Wechat and platform Baidu (Search+Map+ QQ—both owned by Tencent. Users do not need to download an additional application Nuomi) and can use Wechat Wallet for payment, which adds to the convenience level. Baidu Nuomi receives traffic from Baidu map and search, two of the dominant applications in China in the map and search sectors. In 1Q15, 25% of Nuomi movie ticket transactions originated from and were completed on Mobile Baidu and maps. UGC (user Mtime, Douban Mtime is the largest all-rounded movie content and service platform in China, integrating generated content) movie ticket sales with movie ratings and audience comments. Users of these websites have a high level of loyalty, stickiness and consumption frequency. The recommendations on these websites further stimulate users' movie watching behaviour. Cinema line Wanda Cinema-line-owned ticketing platforms usually only offer tickets of their own cinemas and provide convenience to members. However, only the big cinema lines, such as Wanda, have the ability to do so given the limited number of cinemas such websites can offer. Source: Credit Suisse research Online video. For the video audience, (1) there is a greater number and variety of Online exclusive videos by content since the regulation is not as stringent as for TV channels, (2) they are able to online video platforms is a search and watch a drama at any time, (3) fewer and shorter advertisements, and (4) new trend which is rising being part of a community with other audiences. For advertisers, (1) the percent of ads watched by an online video audience is higher than a TV audience, as TV drama is usually longer and TV audiences tend to switch channels or walk away from the TV during the ads; and (2) advertisements placed on the internet are more flexible on their placement. A new trend is the rise of online exclusive videos by online video platforms, as (1) the cost of production is still lower than the acquisition of third-party content; (2) there is flexibility to add commercials; and (3) online video platforms own the IP of the content and can use it to develop related products such as games and toys.
Figure 18: Online video advertising revenue growth trend 45 42.6 0.6 56% 55% 40 50% 0.5 35 46% 32.2
30 41% 0.4
25 22.8 32% 0.3 20 15.2 15 0.2 9.8 10 6.7 0.1 4.3 5
0 0 2011 2012 2013 2014 2015E 2016E 2017E
Online video advertising (Rmb Bn) y-y growth
Source: Company data, Credit Suisse estimates
Young China 10 28 October 2015
Sports Another beneficiary of the young China development is the growth of the sports industry, Sports industry is another where we expect revenue to reach Rmb3 tn by 2025 with a 19.4% CAGR. The drivers of beneficiary of the young growth come from both professional and amateur markets. For the professional leagues, a China development key factor of the boost in revenue comes from more flexibility in broadcasting regulation, allowing sports leagues to sell their broadcasting rights to entities other than CCTV. For example, we expect the price of the broadcasting rights for China Football Association Super League (CSL) to increase from Rmb50 mn in 2014 to Rmb2 bn in 2018. The second engine is the strong growth of the amateur sports market, with marathon the most notable example. According to the Chinese Athletic Association, the number of marathon race participants increased from 500k in 2012 to over 1 mn in 2014. The key reasons for the strong growth of amateur sports are: (1) increasing health consciousness, (2) low entry barriers, (3) encouragement of social media, and (4) government support in organising these events in different cities. The profitability of these amateur events could increase very rapidly with a larger number of participants.
Figure 19: P/L analysis of Tier 1 marathon (e.g., Guangzhou) Figure 20: Sports event revenue breakdown
(Rmb mn) 2012 2013 2014 2015F Revenue breakdown Revenue 13.0 30.0 50.0 60.0 Sponsorship 8.5 24.0 42.5 50.0 China Soccer 2% 90% 8% Others 4.5 6.0 7.5 10.0 Cost (12.0) (11.0) (20.0) (26.0) Europe major leagues 40% 30% 30% Media Rights (CCTV) (3.0) (3.5) (5.0) (6.0) Operations & Others (9.0) (7.5) (15.0) (20.0) NBA/ English Premier League 50% 30% 20%
Profit 1.0 19.0 30.0 34.0 0% 20% 40% 60% 80% 100% 120%
Media broadcasting rights Sponsorship and titling Gate Revenue and other merchandising products Margin % 7.3% 63.3% 60.0% 56.7% Source: Credit Suisse estimates Source: eeo.com.cn, Credit Suisse Young travellers The key features of the Chinese young travellers are: We like Ctrip in the travel sector under the "Young (1) Spontaneous. According to Ctrip's date, 59% of the travellers born in the 1990s book China" theme their trip only three days in advance, and they are not interested in traditional group travel; (2) Unique. A significant portion of the "post 90s" (31%) have already visited at least three of the five most common travel destinations of mainland Chinese, i.e., HK, Singapore, Korea-Seoul, Thailand-Bangkok, Taiwan-Taipei, so they would look for new destinations. Recently, there is a specific strong trend into leaving for island destinations such as Sri Lanka, Saipan, Maldives, or exotic destinations such as Africa or Middle-East countries. (3) Social. UGC (User Generated Content) platforms are becoming very popular among young Chinese as they like to share/exchange travel information, while another interesting feature our China travel analyst observed is that "post 90s" are open to the concept of "trip sharing", i.e., they might look for travel partners through social platforms/APP, or even "group up" directly at the destination. Among travel related stocks, we like Ctrip, as it owns the largest user base in the on-line travel agency segment, which gives it a strong leverage to expand into ancillary business.
Young China 11 28 October 2015
Figure 21: Young travellers prefer independent travel over pre-designed routes/agendas offered by traditional agencies
60% Prefer independent travel 81%
40% Booking through travel agency 20%
42% Booking through hotel website 57%
51% Spend on shopping 54%
Share travel pictures/experience 81% through social media 93%
0% 20% 40% 60% 80% 100%
Age >35 Age <35
Source: Hotels.com What car will they drive? There are three key trends in the auto sector which fits in well with demand from young Shorter product cycle, Chinese: internet connectivity and autonomous vehicle, car (1) Shorter product cycle, particularly for electric vehicles (EVs). Due to the EV customisation are the three product's modularisation design, they have remarkably fewer parts and are much key trends of the auto sector easier to manufacture and assemble. This allows for a shorter product cycle and helps which fits the demand from cater to the fasting moving demand of young Chinese, young Chinese (2) Internet connectivity and autonomous vehicles. Major Chinese IT companies like Tencent, Alibaba and Letv have already established tie-ups with major auto makers to explore the introduction of services such as mapping, messages, music and payment in cars. While autonomous vehicles are likely still years away from making it to the market, this would also be an area of development along with infotainment system. (3) Car customisation. According to JD Power's survey, for the "post 90s" Chinese, they emphasise more on car design than their western peers, and 61% of those surveyed indicate they prefer a tailormade car. Accordingly, O2O car customisation services are emerging in China and some mass brand OEMs, such as Changan Auto, Beijing Hyundai and Great Wall Haval etc., are already offering such services. In the future, we expect Chinese customers to be able to customise their cars on the website or through Apps (including exterior design, interior design and infotainment system etc.), place the order and make the payment online directly.
Young China 12 28 October 2015
Figure 22: Comparison—consideration on car purchase 60% 56% 50% 49% 48% 50% 45% 39% 40%
30%
20%
10%
0% Car design Quality Safety Chinese post-90s Western post-90s Source: JD Power Our China auto analysts believe that Chinese OEMs have competitive advantages in this Our top picks are Geely and new market environment with their quicker response to demand changes, keenness on Harmony in the auto sector auto electronics and better understanding of customer demand. Our top picks are Geely, which is well positioned to capture the fast-evolving demand on upgrading technology and product, mainly due to its team-up with Volvo, and Harmony which has tied up with Tencent to develop new energy vehicles. Online wealth management With the income growth of young Chinese, our banking analyst expects strong growth in We expect strong growth in online wealth management as (1) compared to the older generation, this generation has online wealth management much better wealth management consciousness, (2) they have much better knowledge of computers and smartphones, (3) they are more aggressive in their investment style and can accept higher risk products, and (4) they have customised needs on their wealth management, and want to invest any amount any time and any where. Currently, the online wealth management market is dominated by three major types of players: (1) major internet companies such as Baidu, Alibaba and Tencent, which has unique advantages on its long-term accumulation of customer resources and platform advantages, (2) traditional financial institutions which have more expertise in risk management and rich resources of high-yield assets, and (3) independent third-party organisations, which have a very good base of high income clients and user stickiness.
Figure 23: China wealth management sector AUM by Figure 24: China online wealth management sector AUM managers breakdown by channel
Banks Trust
Insurance Securities companies Third-party: P2P (RMB tn) Mutual fund companies Private fund 22.0% 40 38.4 PE/VC 35 30 26.4 25 20.5 Third-party: 20 WM 15.1 BAT 15 6.8% 10.6 55.7% 10 5 Traditional 0 financial 2010 2011 2012 2013 2014 institutions 15.4%
Source: CBRC; CTA; CIRC; CSRC; AMAC, Credit Suisse research Source: Rong360; Wangdaizhijia, Credit Suisse research
Young China 13 28 October 2015
Less kids, more robots As mentioned above, the number of youngsters will decline from the "post 90s" generation We like Han's Laser in the onwards, and their education has improved significantly from those of their fathers or older automation sector brothers. Therefore, it will be increasingly difficult to find enough labour for jobs that are exposed to high temperatures, danger and a poisonous environment, and such vacancies will naturally need to be replaced by robots and automation systems. Both our China industrial and technology analysts agree that based on the experience of Japan and Korea, robots should start to take off in China. Currently, the Chinese automation system manufacturers are still playing catch-up with developed world suppliers, but we believe that the gap will close in the next few years, as (1) when the users of robotics are more familiar with the overall system, they will feel more comfortable to choose the products produced by local manufacturers; (2) the Chinese suppliers are also upgrading their products after the current round of fund raising; and (3) government support will take time to be effective. In this segment, we like Han's Laser, which is benefiting from vertical integration and product expansion.
Figure 25: China has already reached the take-off point of robot ownership based on old age dependency 80 450,000 Japan old Japan robot 400,000 70 ownership dependency ratio 350,000 60
Korea old 300,000 50 dependency ratio 250,000 40 China robot ownership 200,000 30 China old 150,000 20 Korea robot dependency ratio 100,000 ownership 10 50,000
- - 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019 2022 2025 2028 2031 2034 2037 2040 2043 2046 2049
Japan old age dependency China old age dependency Korea old age dependency Japan robot ownership (RHS) China robot ownership (RHS) Korea robot ownership (RHS)
Source: IFR, World Bank Longer and better growth China made great economic progress since the reform and opening-up in 1978. The Our top pick is BEW in the extensive economic growth mode in the early stages, however, was at the cost of environment sector environmental destruction. Recently, Under the Dome, a Chinese documentary film by Chai Jing, a former China Central Television journalist, concerning air pollution in China, was viewed over 150 mn times on Tencent within three days of its release. It aroused a social resonance, especially with the younger generation. We remain positive on the China Environment sector, with solid fundamentals underpinned by robust treatment demand growth, non-stop upgrade potential, and consistent policy support. (1) We expect the upcoming 13th five-year plan for the China environment sector to provide a consistent policy push, a more aggressive investment plan (likely Rmb10 tn), higher targets for air and water quality, with a key focus on water. (2) We believe the accelerated five-year investment plan, combined with the strong project pipeline of major operators, will significantly improve the visibility of the sector's growth outlook beyond 2017E. (3) We are incrementally more positive on water. Our top picks are BEW.
Young China 14 28 October 2015
Figure 26: Environment sector as percentage of GDP is expected to rise further Environmental related investment (Rmb bn) as % of GDP (%)
3,000 2.7% 3.0% Env-related inv (Rmb bn) 2.5%2.6% 2.4% 2,500 % of GDP 2.3% 2.5% 1.9% 2.0% 1.8% 2,000 1.7% 2.0% 1.6%1.5% 1.5% 1.6% 1.4% 1,500 1.3% 1.5% 1.1% 1.1%1.2%1.2% 1.2% 0.9% 1.0% 1,000 1.0%
500 0.5%
- 0.0%
2008 2009 1999 2000 2001 2002 2003 2004 2005 2006 2007 2010 2011 2012 2013 2014
2015E 2016E 2017E 2018E 2019E 2020E
Source: CEIC, company data, Credit Suisse estimates
Young China 15 28 October 2015 Beneficiaries of "Young China" We believe the following stocks will be key beneficiaries of the "Young China" theme: JD.com, Anta Sports, CITS, Haitian Flavouring, CAR, Alibaba, Vipshop, 58.com, Wanda Cinema, Wisdom, Ctrip, Geely, Harmony Auto, Han's Laser and BE Water. JD.com (JD.OQ) JD is China's second-largest B2C company (19% share vs Tmall's 61% in 2014), well JD's differentiation strategy positioned to benefit from the change in Chinese young adults' consumption behaviour will satisfy Chinese young and robust sector development (46% CAGR over 2013-17E). JD differentiates itself in: (1) adults' consumption needs 100% product authenticity warranty; (2) rapid, accurate and consistent delivery; and (3) a good price. Its unique in-house logistics system is the foundation. JD promises next- or half-day delivery service in more cities than peers. The shopping experience is highly rated by its target customers, who care about product authenticity and are less price- sensitive. We believe JD developing warehousing capacity with its marketplace vendors would accelerate marketplace growth and drive profitability improvement. This differentiation will satisfy Chinese young adults' consumption needs. Anta (2020.HK) Anta, the No. 1 domestic sportswear brand in China, has continued to gain market share Anta could capture in the past few years. Riding on the trend of lifestyle change and younger consumer mix, diversified demand in the Anta is one the first movers to catch up with the opportunity and react. The company has market been focusing on end-demand and increasing R&D, which implies its management's flexibility and the spirit of innovation. We believe the newly launched series of running shoes that are equipped with high-tech functionalities and capture diversified demand would be a new spotlight in the coming future. CITS (601888.SS) CITS is the only nationally licensed duty-free store (DFS) operator in China. The duty-free We see strong sales growth segment in China will grow along with (1) improving infrastructure (airport coverage), (2) of CITS strong outbound trend (20-30% growth), and government support—expecting further policy release each year. Young tourists (age <35) tend to spend more on shopping (54%) than the elder group. In China, CITS has more than 200 points of sale. We see 20-30% sales growth for its duty-free sales segment, driven by shopper volumes and 20-40% sales growth at its flagship mall in Sanya. Haitian Flavouring (603288.SS) Haitian is the largest soy sauce company in China, with a 16% market share (vs 14% Haitian would largely benefit combined market share of the top 2-5 players). The brand has a 60-year heritage. from strong growth in Compared with other age groups, the young adults in China dine out more and cook less downstream catering at home. The rise of the young generation is driving the growth of catering—catering retail demand sales recovered in 1H15 from the anti-corruption impact (15%/16% YoY in 1Q15/2Q15 vs 9-10% in 2013-14). Given Haitian's large exposure to catering customers (>60% of revenue) in the catering industry (vs. major competitors Jonjee’s and Jiajia’s <15%), it would largely benefit from strong growth in downstream catering demand. CAR (0699.HK) CAR is the largest rental company in China with over 30% market share, benefiting from CAR will benefit from robust robust growth in the China auto rental market (27% CAGR in the next five years, on growth in the China auto younger consumers' improving affordability and life style change). On top of that, CAR has rental market 10% equity investment in UCAR. UCAR is doing car sharing business, contributing 35% of CAR's revenue/profit. UCAR currently operates 27,000 vehicles and is expected to own 35,000 vehicles by end-2015. This compares with CAR's 55,000 ST rental fleet size. UCAR’s valuation more than doubled in nearly two months (from US$1,250 mn in July 2015 to US$3,550 mn in September 2015), on the back of its strong fundamental improvement (daily rides, number of customers, repeating consumption, ticket size, discounting, and profitability).
Young China 16 28 October 2015
Alibaba (BABA.N) BABA remains as the sector top pick with 24% potential upside. We believe there is a Large opportunity in BABA's large opportunity in BABA's fast growing e-commerce eco-system. BABA is at a critical fast growing ecommerce inflection of re-accelerated growth. In the upcoming CY 3Q15 results, we expect the eco-system company to see its first YoY take rate increase since its IPO. This implies revenue to see accelerated growth above GMV. Other share price drivers over the next few quarters include: an upgrade in the logistics network leading to higher GMV growth across different categories (such as home appliances, grocery), single-day sales and upside from Ant Financial. Our DCF-based TP of US$95 implies 33.1x CY16E and 25.4x CY17E diluted adjusted EPS. Vipshop (VIPS.N) We believe buyside expectations have come down meaningfully but sellside seems to be We expect 72%/55% YoY still lagging. 3Q so far is tracking in line with guidance, according to our recent checks with growth for 3Q/4Q15 for VIP management. The 4Q outlook will play a more crucial role for the stock to regain Shop confidence. We expect 72%/55% YoY growth for 3Q/4Q15. VIPS started to hold its "Super Brand Day" in 2Q on a routine basis, concentrating resources to highlight major brands & to avoid unhealthy promotion. Our TP is based on 30x 2016E P/E on the back of a 50% EPS CAGR over the next two years, at a premium to other e-commerce and China internet names. 58.com (WUBA.N) We maintain our overall cautious view on almost all O2O service e-commerce segments. We believe 58.com will The only stock we recommend accumulating at the current price is 58.com, which we deliver improving core believe will deliver improving core classifieds profitability, with potential catalysts in classifieds profitability, with external capital-raising for its two major loss-making businesses: Home, and Guazi Used potential catalysts in Car. Ganji's new initiative, Ganji Haoche (now named as “Guazi”), offers C2C-based used external capital-raising car services. Ganji Haoche takes 3% commission, and its services are now available in 26 cities across China. The company also aims to take 80% of the market share in the online C2C used car market this year. Major competitors include Renrenche, backed by Tencent, Shunwei and Redpoint VC. Overall, we maintain our OUTPERFORM rating and TP of US$66. Wanda Cinema (002739.SZ) China’s box-office grew at 40% CAGR for the past five years to reach Rmb29.6 bn in 2014 Wanda Group is vertically and is expected to grow at 20% CAGR over the next five years. We believe cinemas are integrated with a strong the biggest beneficiaries of this trend benefiting not only from box-office growth, but also presence across China’s from traffic-driven non-box-office growth. Among cinemas, Wanda Group is vertically box-office value chain integrated with a strong presence across China’s box-office value chain. It is the dominant player in the cinema business and leads in both box-office and non-box-office sales. The company plans to increase its number of cinemas from 200+ to 1,000 and expand its box office market share from ~15% to ~30% by end-2020. Wisdom (1661.HK) Driven by people’s growing appetite for a better lifestyle, sport industries have entered a Wisdom stands to benefit as phase of fast growth. As the industry was traditionally controlled by government agencies, the largest footrace the opening up of the sector to private companies has benefited the likes of Wisdom. organiser Wisdom Sports Group has successfully transformed its business from a pure advertising agency to a reputable sports organisation in China. As the popularity for footrace is rapidly increasing in China, Wisdom stands to benefit as the largest footrace organiser, who has also developed its self-owned IP events including “Season Run”.
Young China 17 28 October 2015
Ctrip (CTRP.OQ) Ctrip owns the largest user base in the on-line travel agency segment, which gives it a Ctrip owns the largest user leverage to expand into ancillary businesses such as its own UGC platform, and the base in the on-line travel vacation rental market. As the largest OTA in China, Ctrip is the top choice as the China agency segment partner for all the major foreign players, such as Expedia, Royal Caribbean, Booking.com, and the like. This will also strengthen Ctrip's overseas tourism resources. Moreover its outbound hotel reservation volume (including Taiwan and Macau) achieved triple-digit YoY growth, accounting for 10% of the total hotel volume. The international air ticketing business is also growing rapidly, accounting for 15% of the total air ticket volume. For the packaged tour business, international travel accounted for 50% of the total travel volume and 65% of total revenue. Its baby tiger programme makes outbound travel easier. Geely (0175.HK) Geely, whose products are mainly sold to young first-time customers, knows how to meet Geely knows how to meet the taste of younger generation customers. Moreover, we are positive on the Volvo-related the taste of younger long-term benefits to Geely: (1) co-developed modularised platform paves the way for generation customers shorter product cycle. Geely and Volvo have co-established a research centre in Gothenburg (China-Euro Vehicle Technology, CEVT) to develop the new generation modularised car architecture—Compact Modular Architecture (CMA). Meanwhile, Geely will also develop another modularised car architecture—Framework Extendable (FE) platform for its new Emgrand SUV. The architecture technology could enjoy a lower cost by offering variations in the overall length, width, height, wheel base, wheel size, based on shared components. Meanwhile, it can shorten the new product R&D cycle, via easy change and adapt to new customer preferences and trends. (2) Leveraging Volvo's global supply chain and technology: Geely, as one of the few Chinese local brands, has gained access to the global auto parts supply chain via Geely-Volvo joint R&D and procurement. Its global supply chain exposure enables Geely to source high quality cutting-edge components to ride on the trend of vehicle electrification and automation. With the Geely- Volvo story playing out, we believe Geely is well positioned to capture the fast evolving demand of the younger generation customers on upgrading technology & product through Volvo support. China Harmony New Energy Auto (3836.HK) Harmony Auto, a leading luxury dealer group in China, is transforming into a new energy Harmony Auto is vehicle (NEV) maker. It has tied up with Tencent and a leading tech company and has transforming into a new acquired an 88% stake in Greenfield Motor (a NEV maker). The ambitious alliance is energy vehicle maker aiming to offer high-quality internet-enabled intelligent EV series. Harmony guided that this ambitious alliance plans to build a new high-end electric vehicle plant in Zhengzhou city, with 200,000 units of annual capacity. This plant will be used to launch high-end products, such as a pure-electric internet-enabled intelligent vehicle by end-2017, which could drive 300 km on a single charge with 180 km/hour of maximum speed. We are positive on this coalition to penetrate China's fast growing EV market, given (1) EVs are very simpler mechanically to ICE vehicles, with far fewer parts, making it much easier for new entrants to get into the electric vehicle game; (2) one of its partner's well-developed EV component supply chain along with the strong battery expertise of Boston power, its battery supplier; and (3) Tencent's expertise in on-line Infotainment and Telematics and Harmony auto's strong EV aftersales network. Hans Laser (002008.SZ) Han's Laser is the world's largest laser marking equipment manufacturer with 40% market Han's Laser has a chance to share. Its steady growth (16% EPS CAGR) was a showcase of the global consumer be successful in vertical electronics boom. China's laser market growth (15%) is likely to be one of the fastest integration globally (5-10% CAGR) by 2020. The advantages of laser have been gradually recognised and lowering cost has increased penetration. Rising demand for customised and better designed 3C industry products creates a healthy demand for laser equipment. Rising competition between consumer electronics companies also makes them seek for better
Young China 18 28 October 2015 processing techniques including laser. Han's Laser has been promoting the technology through partnership with IPG. Meanwhile, Han's Laser is expanding into the high-power cutting and welding market, which is estimated to be a much bigger market than marking. To increase profitability and reduce dependence on key component suppliers, Han's Laser is vertically expanding into high-power laser generators, which has high entry barriers, high margin and with a sustainable replacement market. We think Han's Laser has a chance to be successful in this vertical integration because of its track record in the low- power market and cooperation with international technology leaders. BE Water (0371.HK) We expect BEW's profit growth from operations to reach 25% CAGR for 2015-17E, mainly We expect BEW's profit driven by water treatment volume growth. We expect BEW to benefit from potential further growth from operations to plant upgrade to quasi-surface water IV which could boost unit EBITDA by HK$0.2/t for reach 25% CAGR for 2015- 2020E. BEW has 19.7 mn t/d water capacity on hand, 103% above its current operating 17E capacity. With 50% of current water capacity in grade I-A, BEW will also benefit from faster and higher WWT plant upgrade process by incorporating a full I-A upgrade and 50% of 'quasi-surface water IV' upgrade and, by 2020E, we estimate 21% improvement in earnings and 11% in valuation. We maintain our OUTPERFORM rating with a target price of HK$8.00/sh.
Young China 19 28 October 2015
Detailed sector impact of the "Young China" theme
Young China 20 28 October 2015 Young Chinese consumers Kevin Yin +852 2101 7655 ([email protected]) Addiction to internet and mobile devices According to 360 Internet Security Centre's survey results, about 60% of the 1990s born Generally the 1990s born generation (15-25 years old) spend more than three hours a day on the internet via spend more time on the smartphones, and 21% of 360 anti-virus users spend more than two hours/day on internet internet gaming. About 50% of the 1990s born generation check their mobile phone every 15 minutes. They can handle most of their daily tasks through about 50 apps on their mobile phones: searching work and leisure info, socialising, chatting, shopping, gaming, books and movies, booking restaurants, planning holidays and weddings. One of the interesting findings is that free Wi-Fi is a critical criterion for them to pick a restaurant.
Figure 27: Above 60% of the 1990s generation spends Figure 28: Nearly 50% of the 1990s born generation check more than three hours surfing internet via smartphones their smartphone every 15 minutes Below 30 0.5~1 hour One day mins 9% Half day 2% 4% 1% 0~5 mins 19% 1~2 hours Above 5 13% hours 32% 31~60 mins 7%
1~3 hours 30% 6~15 mins 30% 3~5 hours 16~30 mins 27% 26%
Source: 360 Internet Security Centre Source: 360 Internet Security Centre
Figure 29: 1990s born generation—number of apps in Figure 30: 1990s born generation—number of gaming smartphones apps in smartphones 101~200 above 200 Above 10 apps No apps apps 6% 2% 8% 1% 51~100 apps 6~10 1 game 19% games 11% 17%
5 games 2 games 11% 15%
1~50 apps 4 games 78% 13% 3 games 19%
Source: 360 Internet Security Centre Source: 360 Internet Security Centre
Young China 21 28 October 2015
Heavy and loyal online shoppers Above 50% of total online shoppers are 1985-95 born (20-30 years old) The 1985-95 born generation (20-30 years old) accounted for 50% of the total normal- Above 50% of total online shopper population and 51.9% of the total heavy-shopper population, according to the shoppers are 1985-95 born China Internet Network Information Centre (CNNIC).
■ Normal shoppers refers to consumers who do online shopping 28 times a year (average 2.3 times/month) with an average annual spend of Rmb5,374 (average ticket size of Rmb192).
■ Heavy shoppers refers to consumers who do online shopping 146 times a year (average 12 times/month) with average annual spend of Rmb25,220 (average ticket size of Rmb172).
■ Normal shoppers account for 87.1% of the total online shopper population, and heavy-shoppers 12.9%.
■ Males account for 57.1% of total normal shoppers and 61.6% of total heavy shoppers.
Figure 31: Online shoppers, breakdown by age Figure 32: Online shoppers, breakdown by education level
60% 45% 51.9% 40% 38.7% 50.0% 50% 34.3% 35%
40% 30% 26.4% 24.4% 25% 23.0% 29.0% 30% 20% 18.6% 20.0% 15% 20% 10.5% 14.4% 9.1% 10% 10.0% 6.0% 10% 8.3% 3.5% 4.2% 4.5% 3.7%4.1% 5% 1.9%2.2% 1.3% 0% 0% Below Junior high High College Undergraduate Above Below 19 20-29 30-39 40-49 50-59 Above 60 primary school school school Graduate Normal online shopper Heavy online shopper Normal online shopper Heavy online shopper Source: CNNIC Source: CNNIC The fast-growing e-commerce business in China E-commerce sales increased 49.7% YoY in 2014, accounting for 10.6% of China's total E-commerce sales retail sales (including gas, auto and some corporate spending). E-commerce penetration increased rapidly in China reached 10.7% in 2014 and is expected to reach 20% in 2020, vs the US's 7.6% and Japan's 3-5% in 2014. According to the CNNIC's consumer survey results, excluding those who never do any online shopping, an average Chinese consumer allocated 14% of their total shopping budget to online shopping in 2014, and 76% of them spent less than 20% of the budget on online shopping.
Young China 22 28 October 2015
Figure 33: E-commerce penetration—China vs the US Figure 34: Online as % of total shopping budget (2014)
4.3% 9.7% <1% 12.5% 1%-5% 6%-10% 9.0% 76.1% shoppers spend less than 11%-20% 20% of expenditure 26.8% for online shopping 21%-30% 12.7% 31%-50%
51%-80%
24.1% 81%-100%
Source: iResearch, US Department of Commerce, Credit Suisse Source: CNNIC estimates What do they buy online? Apparel and shoes, PC and mobile, and groceries remained the top three categories that consumers shopped online in 2014. Consumers did more online shopping for home appliances, F&B, flight and hotel bookings, and movie and show tickets online in 2014 than in 2013.
Figure 35: Online shopping penetration breakdown by category (2013 vs 2014)
80% 75.6% 75.3% 2013 2014 70%
60%
50% 45.1% 43.3%
40% 37.5% 34.9% 34.4% 32.7% 33.1% 30.6% 30% 26.6% 25.9% 25.4% 24.9%25.7% 22.7% 22.4% 24.1% 18.7% 20% 16.6% 16.8% 18.0% 16.3% 15.4%15.3% 14.5% 12.9% 12.7% 12.2% 10% 7.3%
0% Clothing, 3C Grocery Prepaid Home Cosmetics F&B Bag Book & Flight & Movie Catering Sports Baby Gold & shoes & card appliance Video hotel ticket goods products Jewelry hats booking Source: CNNIC Credit Suisse Emerging Market Consumer Survey suggests that 41% of 20-30 years old Chinese young adults consumers' electronic purchases were digitally mobile (smartphones, tablets, notebooks, buying more digital devices etc.), versus 10-20% for other emerging markets (Russia, Brazil, India, and Indonesia). than peer countries
Young China 23 28 October 2015
Figure 36: Percentage share of electronic purchases that are digitally mobile
45% 41% Digital mobility defined as digital equipments 40% that has a mobile feature including e-reader, 35% GPS, internet, smart phone, notebook PC 30% 25% 20% 19% 20%
15% 11% 11% 10% 5% 0% China Russia Brazil India Indonesia
Digital mobility electronics as % of total electronics purchases by 18-29 HH
Source: Credit Suisse Emerging Market Consumer Survey What do they care for in online shopping? Taobao, Tmall, and JD have the highest brand penetration level among all peers. Chinese consumers rate brand franchise, vendor/website reputation and price as the top-three factors for them to determine online shopping.
Figure 37: Penetration of online shopping platform Figure 38: Determining factors for online shopping 100% 80% 87.0% 71.1% 90% 70% 62.3% 80% 58.1% 57.3% 69.7% 60% 70% 50% 44.8% 60% 38.4% 50% 45.3% 40% 29.4% 40% 30% 26.9% 26.8%
30% 20% 18.8% 20% 16.2% 14.2% 12.9% 12.6% 11.7% 10% 6.8% 10% 0% 0% Brand Vendor Price Delivery Product Promotion Delivery Express User Other Taobao Tmall JD VIP Dangdang Suning Yihaodian Amazon Jumei franchise reputation speed reputation level fee reputation experience
Source: CNNIC Source: CNNIC High willingness to open wallet for entertainment Compared to older generations, the young generation spends more time and money on The young generation entertainment and other enjoyable activities (gaming, travel, movies, and dining out). spends more time and Actually, the young generation has already become the core customer group of the money on entertainment enjoyable activities market—young people (<30 years old) account for 60% of outbound and other enjoyable travel and 50% of movie audiences. We see high growth potential in entertainment sectors activities (dining out, gaming, travel, movie) with more and more young consumers (born after 1990) graduating from college and climbing up the career ladder. Above 60% of outbound tourists are aged 21-30
■ Outbound tourists are younger: In 2014, tourists below 20 years accounted for 8% of total tourists, or 2 pp higher than in 2013, while other age groups remained flat or slightly declined.
Young China 24 28 October 2015
■ Young tourists are more independent: Young tourists prefer independent travel, and book hotels through websites rather than travel agencies.
■ Young tourists spend and share more: Young tourists' spending on shopping is higher, and over 90% would share their pictures/experience through social media.
Figure 39: Above 60% of outbound tourists are aged 21-30 Figure 40: Above 80% of young tourists (below 35 years old) prefer independent travel
70% 66% 62% 60% Prefer independent travel 60% 81%
40% 50% Booking through travel agency 20% 40% 42% Booking through hotel website 57% 30% 25%25% 51% Spend on shopping 20% 54% 8% 10% 6% Share travel pictures/experience 3% 3% 81% 1% 1% through social media 93% 0% <20 21-30 31-40 41-50 >51 0% 20% 40% 60% 80% 100%
2013 2014 Age >35 Age <35
Source: Qy.com Source: Hotels.com Young adults account for 50% of the movie audience China's movie industry (box office) has been in a rapid growth phase for the last five years China's movie industry (box (a 40% CAGR over 2009-14), mainly driven by: (1) the government's strategy on 'culture office) has been in a rapid development', and (2) rising demand for entertainment from the youth. We believe the growth phase strong momentum will continue for the next five years, on the back of younger consumers' rising income levels and life style changes. Credit Suisse expects the sector to witness a 20%-plus CAGR over the next five years, exceeding the US box office market size in 2017E. The younger generation (born between 1985 and 1995; relatively affluent and better educated) is the major contributor for this box office boom.
■ Young people (aged below 30 years old) account for more than 50% of the total audience in China, according to an Entgroup study.
■ Over 80% of the audience has a college or undergraduate degree.
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Figure 41: China's movie audience, breakdown by age Figure 42: China's movie audience, breakdown by education 60% 90% 81% 51% 49% 80% 50% 70% 37% 40% 36% 60%
30% 50% 40% 20% 12% 30% 9% 10% 6% 20% 1% 9% 10% 7% 0% 1% 1% Below 18 19~30 31~40 Above 41 0% 2012 2013 Below junior High school Undergraduate/ Graduate Above Doctor high school college Source: Entgroup study Source: Entgroup study Movie is the most popular entertainment medium for the young generation. According to Movie is the most popular Entgroup, 84% of the youth like to watch movies, followed by music (55%) and "Zhai" entertainment medium for (32%), reading (31%), sports (27%), travel (22%), party (21%) and shopping (15%). In the young generation terms of the frequency of watching a movie, 66% of the youth visit a cinema 1-2 times per month, compared with 32% visiting a cinema 3-6 times per month.
Figure 43: Young generation entertainment style ranking Figure 44: Frequency of watching a movie each month for the young audience Above 7 90% 84% times 80% 2%
70%
60% 55%
50% 3~6 times 32% 40% 32% 31% 30% 27% 1~2 times 22% 21% 66% 20% 15%
10% 7%
0% Movie Music "Zhai" Reading Sports Travel Party Shopping Others
Source: Entgroup study Source: Entgroup study Pursuit for unique style "Just like it" is one of the most important factors for the 1990s born generation to determine We expect the young purchases. It was ranked by 77.3% of survey respondents, followed by price (40.5%), generation to upgrade their recommendation from friends (31.9%), quality (30.5%), recommendation from parents spending towards higher (25.5%), trendy (21.7%), and brand image (19%), according to a Peking University survey in quality items and more 2015. premium brands, following an increase in age and It is interesting that advertising and promotion, introduction by shopping assistants, and income levels celebrity effect have a combined weighting of only 20%.
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We think, in addition to 'preference' and 'mental conditioning', one key reason for the 1990s born generation to rank brand image low is the affordability level of this age group, given they are mainly college students and young graduates. They would have a stronger desire to upgrade their spending towards higher quality items and more premium brands, following an increase in age and income levels.
Figure 45: A survey of the 1990s born—"What do you care for in shopping?"
Source: Peking University Marketing & Media Research Center 2015 In the Credit Suisse Emerging Market Consumer Survey, when asked about their next year’s purchase intent, the generation born between 1985 and 1995 allocated 40% of their purchases to leather goods, bags and shoes to global brands.
■ Apparel: When asked about their next year’s purchase intent, China’s 18- to 29-year- olds said they would allocate 81% of purchases to branded apparel (including 33% to global brands); this compares with their emerging market peers’ 70% (including 26% to global brands).
■ Sportswear: Young Chinese intend to allocate 95% to branded products (including both local and global; brands), versus 83% among emerging market peers.
■ Watches: Our survey noted that the 18- to 29-year-olds spend 16% less per purchase than that of the national average; however, when they move into the 30-45 group, they quickly turn top buyers, spending 28% above the national average. This potentially suggests that while watches are not a top priority on their financial agenda, the 18- to 29-year-olds pay close attention to them and hold a covert desire for this special item.
■ Jewellery: Jewellery purchases made by the 18-29 and 30-45 age groups have been significantly lower than that of the older groups over the years. We think this depends on consumer preferences and wealth levels. We expect jewellery penetration to increase in the coming future, following rising income levels and lifestyle changes. Who will win the heart of young Chinese consumers? Chinese consumers are moving away from traditional department stores and supermarkets to online stores. Nearly 50% of online shoppers are 20-29 years old. While apparel, digital and grocery remain the most popular categories for online shopping, we observe accelerating demand for online shopping of travel products (flight, hotel and tours) and entertainment (movie and show tickets). Chinese consumers' shopping behaviour changes, China's robustly-developing O2O Traditional brands losing businesses, and the sharing economy (CS Global Thematic Report: The Sharing Economy) edge in distribution are lowering the entry barriers and creating massive business opportunities for young
Young China 27 28 October 2015 players to grab the wallet share of young adults. However, they are also partially destroying traditional companies' competitive advantage in distribution, in our view. We believe the long-term winners should be the ones that are able to: (1) build a The money goes to: compelling 'young' brand with innovative designs (such as Rio, Three Squirrels, UPC, and innovative brands, e- Anta), (2) a provide pleasant consumption experience (i.e., Alibaba, JD, Ctrip, VIP, and commerce, and companies CITS), and (3) benefit from a business model that leverages the "sharing economy" (i.e., having a 'sharing economy' Didi/Kuaidi, and CAR). This compares with the traditional companies (i.e., Tingyi, Want business model Want, and Belle) who are losing growth momentum. Young players grabbing share from old ones In addition to the change in demographics and consumer behaviour, China's fast-growing O2O business and the sharing economy (CS Global Thematic Report: The Sharing Economy) are not only lowering the entry barriers and creating massive business opportunities for young players to grab market share but also partially destroying the traditional consumer companies' competitive advantage in distribution.
■ Rio is a leading alcopop brand in China, according to its own website. Rio's sales witnessed a more than 250% CAGR from Rmb59 mn in 2012 to Rmb1.6 bn in 1H15 (vs Pepsi Cola sales of c.Rmb4.5 bn in China, Want Want's 25-year-old hot-kid milk of Rmb5.2 bn in 1H15). Rio chose product placement as its main marketing channel—cooperating with top TV reality shows targeting the young audience (e.g., “Running Man China”, “何以笙箫默”) to create a fashion and energetic brand image. It invested Rmb200 mn (around 20% of its 2014 sales) in Running Man China’s sponsorship (the most popular reality show in 2014).
Figure 46: Rio’s product placement in Running Man China Figure 47: Sales evolution of Rio
Source: Company website Source: Company data
■ Three Squirrels is a leading online nut brand in China, according to JD.com, though it was founded in 2012. It only sells nuts on e-commerce platforms. Given its first-mover advantage and effective marketplace operation, it has built up dominant brand awareness among online shoppers (one of the best-selling nuts products on JD/Tmall/Taobao, based on JD/Alibaba's company data). It achieved Rmb1.2 bn sales in 1H15 and valuation of Rmb4.0 bn in the D-round fundraising as of 3Q15.
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Figure 48: Three Squirrels' ads on JD.com Figure 49: Sales evolution of Three Squirrels
Source: Company website Source: Company data
■ UCAR (car chauffer service provider), launched in January 2015, is developing rapidly in China. The company currently operates 27,000 vehicles and is expected to own 35,000 vehicles in end-2015, according to our 29 August published report, On the fast track: 1H15 adjusted earnings up 66% on 44% rental revenue growth. This compares with CAR's (China's largest car rental company with a ~30% market share) 55,000 short-term rental fleet size. According to our published report, Hertz sells 2.5% of old shares in CAR; UCAR's valuation more than doubles in about two months on 17 September, the strong fundamental improvement (daily rides, number of customers, repeating consumption, ticket size, discounting, and profitability) triggered UCAR's valuation to more than double in nearly two months (from US$1,250 mn in July 2015 to US$3,550 mn in September 2015). Other major players including Didi/Kuaidi (funded by Ali/Tencent; total valuation of US$15 bn) and Uber China (funded by Baidu; total valuation of US$7 bn) are also growing rapidly in China's car chauffer service market.
Figure 50: UCAR advertisement Figure 51: UCAR valuation 4,000 US$ mn 3,550 3,500
3,000
2,500
2,000
1,500 1,250
1,000
500
0 Jul-15 Sep-15
Source: Company website Source: Company data
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Top consumer picks We measure the long-term attractiveness of 21 consumer subsectors from the angles of Our favourite sectors demand growth, supply-demand dynamics, overcapacity, concentration, consolidation potential, driving forces, profitability, and cash flow quality. We like the e-commerce, sportswear, travel, seasonings, and auto rental sectors the most. Our top picks to play the theme are: (1) JD (product authenticity, superior delivery services Our top picks to play the and category expansion to drive growth); (2) Anta (riding on the shift towards a healthy theme: JD.com, Anta, CITS, and relaxing lifestyle), (3) CITS (the only national duty-free operator), (4) Haitian (60% Haitian and CAR sales from fast-growing catering); and (5) CAR (auto lease, a new lifestyle service product in China; a proxy for investments into the car-sharing business). JD.com: China's second largest B2C player JD is China's second-largest B2C company (19% share vs Tmall's 61% in 2014), well positioned to benefit from Chinese young adults' consumption behaviour change and robust sector development (46% CAGR over 2013-17E). JD differentiates itself in: (1) 100% product authenticity warranty; (2) rapid, accurate and consistent delivery; and (3) good price. Its unique in-house logistics system is the foundation. JD promises next- or half-day delivery service in more cities than peers. The shopping experience is highly rated by its target customers, who care about product authenticity and are less price-sensitive. We believe JD developing warehousing capacity with its marketplace vendors would accelerate marketplace growth and drive profitability improvement. This differentiation will satisfy Chinese young adults' consumption needs. Key catalysts are (1) consumers' increasing preference for authentic products; (2) strong marketplace sales momentum; (3) margin improvement and early breakeven; and (4) M&A and strategic alliance. Anta: Riding on accelerating demand for sportswear Anta, the No. 1 domestic sportswear brand in China, has continued to gain market share in the past few years. Riding on the trend of lifestyle change and younger consumer mix, Anta is one of the first movers to catch up to the opportunity and react. The company has been focusing on end-demand and increasing R&D, which implies its management's flexibility and the spirit of innovation. We believe the newly launched series of running shoes that are equipped with high-tech functionalities and capture diversified demand would be a new spotlight in the coming future. Key catalysts are (1) continuing R&D and new product launches, especially a strong new running shoes promotion in 2H15; (2) robust Fila growth of likely 60%-plus retail revenue increase with margin improvement; and (3) potential M&As. CITS: The only national duty-free operator CITS is the only nationally licensed duty-free store (DFS) operator in China. The duty-free segment in China will grow along with (1) improving infrastructure (airport coverage), (2) strong outbound trend (20-30% growth), and government support—expecting further policy release each year. Young tourists (age <35) tend to spend more on shopping (54%) than the elder group. In China, CITS has more than 200 points of sale. We see 20-30% sales growth for its duty-free sales segment, driven by shopper volumes and 20-40% sales growth at its flagship mall in Sanya. Key catalysts are (1) Beijing Airport concession to open bidding by end of the year— expecting extra 10-20% earnings contribution at least; (2) SOE reform—overhang to be removed by the end of the year. Haitian: 60% sales from fast-growing catering sector Haitian is the largest soy sauce company in China, with a 16% market share (vs 14% combined market share of the top 2-5 players). The brand has a 60-year heritage.
Young China 30 28 October 2015
Nearly 60% of Haitian's sales and earnings come from corporate customers in the catering industry, compared with competitors Jonjee’s and Jiajia’s <15%. Compared with other age groups, the young adults in China dine out more and cook less at home. The rise of the young generation is driving the growth of catering—catering retail sales recovered in 1H15 from the anti-corruption impact (15%/16% YoY in 1Q15/2Q15 vs 9-10% in 2013-14). Key catalysts include: (1) stronger sales growth, (2) success of new product launches; and (3) ASP hikes. Key risks include: (1) food safety; (2) input cost inflation; and (3) slower consumption upgrade. CAR: A proxy for investments into the car-sharing business CAR is the largest rental company in China with over 30% market share, benefiting from robust growth in the China auto rental market (27% CAGR in the next five years, on younger consumers' improving affordability and life style change). CAR has 10% equity investment in UCAR. UCAR is doing car sharing business, contributing 35% of CAR's revenue/profit. UCAR currently operates 27,000 vehicles and is expected to own 35,000 vehicles by end-2015, according to our published report On the fast track: 1H15 adjusted earnings up 66% on 44% rental revenue growth on 29 August . This compares with CAR's 55,000 ST rental fleet size. UCAR’s valuation more than doubled in nearly two months (from US$1,250 mn in July 2015 to US$3,550 mn in September 2015), on the back of its strong fundamental improvement (daily rides, number of customers, repeating consumption, ticket size, discounting, and profitability), according to our published report, Hertz sells 2.5% of old shares in CAR; UCAR's valuation more than doubles in about two months on 17 September. Key catalysts are (1) higher-than-expected private car service demand, and (2) stronger demand from the government.
Figure 52: Valuation comparison—our top ten preferred stocks
Note: * Price/GMV, prices as of 27 October 2015. Source: Reuters, company data, Credit Suisse estimates
Young China 31 28 October 2015 E-commerce: Born to be digital Dick Wei +852 2101 7339 ([email protected]) Evan Zhou +852 2101 6745 ([email protected]) David Hao +852 2101 7310 ([email protected]) Born in the age of internet, China's "post-90s" are naturally adaptive to this fast-evolving China's "post-90s" are digitised world—"Wear, Eat, Live, Travel", they start to experience and spend every bit of adaptive to a digitised world their daily life online. Internet is where they learn how to spend their first buck of pocket money, and e- commerce taught them how to spend in a smart way. Over the past several years, they have grown into an increasingly powerful consumption power in society, asserting more influence in driving structural changes in China's economy. Physical goods e-commerce Digitisation of physical goods retail has made a wide variety of goods available to young Price is not the young Chinese. Price is not their top concern any more. They seek the quality, exclusivity, Chinese's top concern identity and emotional attachment that comes with the selections. How do young Chinese shop online? Young Chinese consumers, namely the "post-90" generation (broadly speaking, the post- Young Chinese are 85s and post-90s), are expected to be the core demographic group in online shopping. expected to be the core According to a CNNIC report, there were 277 mn post-90s internet users in China by end demographic group in online of 2014. Internet penetration among post-90s is 79.6%—31.7% higher than the national shopping average penetration of 27.9%.
Figure 53: Number of post-90s internet user in China 300 Millions 277 90% 256 80% 250 232 235 79.6% 212 70% 195 71.8% 200 60% 64.4% 66.4% 60.1% 50% 150 54.4% 40% 100 30% 20% 50 10% 0 0% 2009 2010 2011 2012 2013 2014
Post-90s internet user population (LHS) Internet penetration(RHS) Source: CNNIC e-commerce related Apps are one of the major category favoured by young internet E-commerce related Apps users. Within the category, online shopping Apps have the highest adoption rate across are one of the major all user groups, followed by online payment and internet banking. The overall adoption categories favoured by rate is 56.9% among post-90s internet users, higher than that in China's total internet young internet users users. The results above all imply that China's post-90s are tech savvy and enjoy online shopping.
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Figure 54: Adoption of e-commerce-related Apps among different user groups 80% 73.5%
70% 65.5% 65.6% 60.7% 60% 57.0% 58.3% 56.9% 54.9% 55.7% 52.3% 48.8% 50% 46.9% 44.3% 43.7% 43.5% 41.8% 39.4% 40% 34.2% 33.3% 32.7% 32.6% 30% 26.9% 26.6% 23.3% 20.1% 17.7% 20% 15.7% 12.3% 12.1% 12.1% 9.5%8.7% 10% 8.0% 8.2% 5.1% 2.7% 0% Primary school student High school student College student Non-student Post-90s user Total internet user Online Shopping Groupbuy Travel Online payment Internet banking Internet finance
Source: CNNIC According to a recent report from ComScore, China's post-90s tends to spend Rmb24 bn every month on online purchases and are more inclined to shop on Taobao than other consumers: 57.2% of young online shoppers choose Taobao as their favourite shopping site, followed by Tmall (30.7%).
Figure 55: Online spending per month by age group 40 37.9 40% 35 35% 36% 30 30% 24 23.9 25 25% 20 23% 23% 20% 15 15% 8.1 10 6.2 10% 4.2 5 8% 5% 6% 0 4% 0% 6-14 15-24 25-34 35-44 45-54 55+
Online spending (RMB Bn) % of total online spending
Source: ComScore
Figure 56: Taobao is the top shopping site to visit for post-90s Age group
15-24 8.8% 30.7% 57.2%
All 9.4% 32.0% 54.3%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Others Suning Yihaodian VIPShop JD.com Tmall Taobao
Source: ComScore
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The report also suggests that the post-90s Taobao users are inclined to spend more on the post-90s Taobao users product categories such as cell phones, toys, daily necessities, furniture, accessories incline to spend more on and skincare, while Tmall users mostly buy apparel and home goods etc. Young online product categories shoppers know how to differentiate their needs by seeking customised items on Taobao and buying standardised goods on Tmall.
Figure 57: Taobao: product category ranking by post-90s Top 5 product categories Cell phone 82% Toys 79% Daily necessities 79% Furnitures 77% Accessories 73% Skincare 70% Office supplies 70% Women shoes 69% Kids 68% Handbag/Luggage 68% Sports 67% Consumer electronics 66% Womenswear 65% Home decoration 65% Kitchenware 64% Auto collection 63% Men shoes 60% Home goods 57% Menswear 51% Underwear 46%
Source: ComScore
Figure 58: Tmall: product category ranking by post-90s Top 5 product categories Underwear 54% Menswear 49% Home goods 43% Men shoes 40% Auto collection 37% Kitchenware 36% Home decoration 35% Womenswear 35% Consumer electronics 34% Sports 33% Handbag/Luggage 32% Kids 32% Women shoes 31% Office supplies 30% Skincare 30% Accessories 27% Furnitures 23% Daily necessities 21% Toys 21% Cell phone 18%
Source: ComScore
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China's post-90s have their independent and precise purchase criteria, they pay for what Own sense, friends' choice, they truly adore and if it is worth of it. They value quality highly as well as the money's word-of-mouth remain the worth, and care less about the advertising and the brand effect. Depending on an most powerful factors individual's unique taste and independent thoughts, well-known mass brand names, influencing the post-90s' celebrity effect and sales reps' recommendation are generally less attractive to them, but purchasing behaviour their own sense, friends' choices, word-of-mouth remain the most powerful factors influencing the post-90s' purchasing behaviour.
Figure 59: Purchase criteria ranking for post-90s consumers
Quality 4.34
Price 3.50
Apprearance 3.09
Utility 2.62
Brand 0.56
Advertising/Marketing 0.15
0 1 2 3 4 5 *Score based on a scale of 0-5
Source: Baidu Consumer Business Group publication < Baidu Post-90s Insight Report 2015>
Figure 60: Factors influencing the post-90s' purchasing decisions
Personal preference 77.3% Most powerful Price 40.5% influencing Recommendation from friends 31.9% factors Word-of-mouth 30.5% Parent's pick 25.5% Latest fashion 21.7% Brand 19.0% Ad/Promotion 9.4% Least powerful Sales rep 5.5% influencing Celebrity effect 5.1% factors Others 6.1%
Source: Market and Media Research Center of Peking University Cross-border e-commerce: front runners in consumption upgrade As we marked the 11th anniversary of Taobao Marketplace, China online shoppers, Cross-border e-commerce especially the young generation, have gone way beyond the domestic market to hunt for has become an important quality, variety and exclusivity. With the tide of economic globalisation and improving part in the e-commerce infrastructure, cross-border e-commerce has become an important part in the e-commerce ecosystem ecosystem. More and more companies and individual consumers are starting to buy and sell merchandise in the global marketplace online. According to Enfodesk, the cross-border e-commerce market in China grew at a CAGR of 33.9% from Rmb0.84 tn in 2009 to Rmb2.70 tn in 2013. We expect cross-border e- commerce to maintain decent growth given continued consumption demand.
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Figure 61: China's cross-border e-commerce transaction Figure 62: China's cross-border e-commerce market volume 2009-13 breakdown
3.0 46.2% 50% 5.8% 6.2% 2.70 12.6% 8.6% 11.1% 41.7% 45% 2.5 40% 2.09 35% 2.0 1.74 29.2% 30%
1.5 25% 20.1% 94.2% 93.8% 1.19 87.4% 91.4% 88.9% 16.7% 20% 1.0 0.84 15%
10% 0.5 5%
0.0 0% 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013
Transaction volume (RMB in trillion) Growth rate (%) Outbound Inbound
Source: Enfodesk Source: Enfodesk Cross-border e-commerce consists of inbound and outbound segments. Although outbound is still the major component in the cross-border e-commerce business given the large volume of "made-in-China" goods shipped to the world every year, inbound e- commerce volume (online shopping) has grown steadily year over year, and the imbalance between inbound and outbound has gradually improved. According to Enfodesk, the portion of inbound business in cross-border e-commerce in China has reached 11.1% in 2013, compared to only 5.8% in 2009. Overseas online shopping, as the "to-consumer" inbound arm of cross-border e-commerce, has grown significantly in the past few years. According to Nielsen, the overseas online shopping population has reached 18 mn with spending of Rmb216 bn in 2013.
■ Overseas online shopping motivations: cheaper, better, fancier Although it usually takes a longer time to receive the products and may be inconvenient to Three incentives for return through overseas online shopping, young Chinese consumers still have enough overseas online shopping: incentives to purchase products from overseas. In our view, there are generally three cheaper, better, fancier types of motivation for consumers to purchase overseas products: (1) reasonable price, (2) trustworthy quality, and (3) exclusive/new products not available in the domestic market.
■ In China, the price of consumer products of mid-to-high-end international brands in certain categories, such as cosmetics, apparel and electronics, is generally higher than the price of the same product sold overseas, mainly due to tax related issues as well as the price discrimination adopted by brands. Therefore, consumers who are sensitive to price are more willing to look for overseas shopping opportunities despite the potential burdens of shipping and after-sales services.
■ Another motivation for shopping overseas is to buy more trustworthy quality products, even though similar products produced by domestic factories are available in the local market. Consumers with this type of motivation normally have higher standards on product quality or safety in certain categories, such as cosmetics, healthcare, or baby and maternity, and prefer trustworthy or safety over price. Although there are substitute goods in the local market, the dissatisfaction with local brands or products in terms of quality motivates consumers to look for high quality choices overseas.
■ Moreover, some products released in other countries may not be available in the domestic market due to various reasons, such as the company's different product release schedule, difference in mass market appetites, and geographical sales
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restrictions. Consumers who are willing to buy specific products which are not available in the domestic market have to resort to overseas shopping channels. According to Nielsen, the top five cross-border purchase categories in 2013 were clothes, shoes and accessories (Rmb22 bn), health and beauty products (Rmb17.6 bn), computer hardware (Rmb13.5 bn), jewellery, gems and watches (Rmb13.1 bn), and personal electronics (Rmb12.9 bn). These categories largely carve the China's consumers portrait in overseas online shopping, and perfectly fit in with the three types of motivation quoted above Sector implication and stock picks The wave of cross-border e-commerce presents both opportunities and challenges for Alibaba remains our top pick China’s incumbent e-commerce players. in physical goods e- commerce In order to capture the growing overseas online shopping market, e-commerce players in China, such as Tmall, Amazon, Jumei and Vipshop, start to take action in incorporating delegated B2C merchandising or marketplace models in their businesses. Through professional e-commerce channels, these e-commerce players could ensure authenticity of the products, and avoid potential legal issues related to import tax and brand protection. By leveraging the expertise in product selection, global logistics operation and custom clearance, the e-commerce players could provide better products and customer services, further lowering the unit cost in shipment and shortening the delivery time.
Figure 63: Listed e-commerce companies' overseas online shopping exposure Total GMV (US$ bn) Overseas exposure Name Delegated B2C model 2014 2015E 2015E Long-term Tmall Marketplace (Direct shipping + Bonded Area) 366.8 474.9 1-5% 10~15% JD Marketplace (Direct shipping) 42.0 71.1 1-5% 10~15% Vipshop Merchandising (Bonded Area) 6.3 11.3 2-3% 5% Jumei Marketplace (Direct shipping) + Merchandising (Bonded Area) 1.1 1.5 30-40% 40-50% NetEase Kaola Merchandising (Bonded Area) 0 1.3 100% 100% Dangdang n.a 2.3 2.9 1-2% 5% Source: Company data, Credit Suisse estimates Physical goods e-commerce is still the preferred sub-segment within China's internet sector. Alibaba remains our top pick, given its attractive valuation, opportunity in its e-commerce ecosystem, and the sustainable e-commerce market growth in China. BABA is at a critical inflection of re-accelerated growth. In the upcoming CY3Q15 results, we expect the company to see its first YoY take-rate increase since its IPO. This implies revenue to see accelerated growth above GMV. We believe the upcoming diversified growth profile (through both GMV and take rate), together with low expectations will likely change the negative sentiment in BABA. PC take rate to increase with expanded ad inventory. The company recently added new ad slots to the Taobao search results page. We expect PC ads to achieve better exposure and a click-through-rate. Yet, with experience in personalisation and better balancing between relevancy and click price, we believe that the impact on user experience would be small. On the mobile side, mobile take rate is expected to track closer to the PC take rate level—with merchants shifting the ad budget to mobile, higher bidding activities and expanded ad inventory since May. Expect margins to stabilise in FY17. BABA saw OPM decline for the past two years with investments consolidation (e.g. Autonavi) and content cost. We expect margins to stabilise in FY17 with SG&A and content cost leverage. Our pecking order in the China physical goods e-commerce space: BABA, VIPS, JD, JMEI, and DANG.
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Tmall Global Tmall Global was launched in February 2014 to provide direct overseas products by international merchants on its marketplace. It requires the merchants listed on its marketplace to be overseas company entities with retail qualifications. All products sold on the platform must be officially import certified by China customs. As of now, Tmall Global has had more than 1,000 brands listed, covering five categories, including baby and maternity, cosmetics, food and healthcare, apparel, and electronics. In August 2014, Tmall Global signed a framework agreement with France Invest in France Agency to sell products made in France directly on its marketplace. In October, Costco, the second largest retailer in the US, signed a strategic collaboration agreement with Tmall Global, and will launch an official online store on Tmall. The newly established official online store on Tmall initially will focus on food and healthcare products, and ship products directly from the overseas warehouses (mainly in Taiwan) to mainland consumers. Overseas merchants on Tmall Global can directly ship their products to consumers in China. In addition, all the orders placed through Tmall Global are required to be shipped out within 72 hours, and delivered within 14 working days. Import tax is paid by the overseas merchants, therefore, the total amount paid by consumers only includes the price of the product and overseas shipping fees. The whole process is monitored by the online system, and can be tracked by consumers. In order to further facilitate the overseas shopping business, Tmall Global signed a cooperation contract with several bonded areas, such as Zhengzhou, Hangzhou, and Ningbo, to provide temporary warehouse storage services for its merchants with no import tax incurred.
Figure 64: Tmall Global Figure 65: Jumei Global
Source: Company[website Source: Company website Jumei In June 2014, Jumei launched its cosmetics overseas online shopping website Jumei Global (jumeiglobal.com). In September, Jumei further opened an independent channel on its main website redirecting consumers to Jumei Global. Jumei employs two different models in its global shopping platform: marketplace and merchandising. In the marketplace model, overseas third-party merchants sell the products on Jumei's Global marketplace and ship products to consumers directly from their overseas warehouses. Similar to other B2C marketplace models, merchants on Jumei Global marketplace will cover the import tax incurred in the overseas shopping process through rebate. Consumers who purchase products on Jumei Global only need to pay the price of the products and overseas shipping expenses.
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After signing a cooperation agreement with bonded areas in Zhengzhou, Henan, Jumei kicked off its merchandising overseas shopping business on Jumei Global. Instead of collaborating with third-party merchants, Jumei Global's merchandising model enables Jumei to store its overseas cosmetics merchandise products in warehouses in these bonded areas, and, similar to other B2C overseas shopping players, it ships the products ordered by consumers directly from its warehouse in these bonded area with limited personal postal articles tax paid by Jumei. Beside cosmetics, Jumei Global started to expand into the baby and maternity category in April 2015. We see baby and maternity as an efficient customer acquisition category, as it is more standardised and popular among Jumei's potential customers. We believe that the company will maintain low margin (0-9%) for baby and maternity products in the coming quarters in order to boost its active customer growth and cross-sell its cosmetics products. Vipshop In September 2014, Vipshop signed a cross-border e-commerce customs supervision cooperation memorandum with Guangzhou Customs, and launched its global sales business. Different from its main consignment business model, Vipshop adopts the B2C merchandising model to collaborate with overseas brands in its global sales business. After a consumer places an order on Vipshop's global sales channel, Vipshop then purchases the products from overseas brands, and ships the product to its warehouse in a bonded area. The products are then delivered to its consumers through its domestic logistics network. Vipshop also targets to invest over Rmb500 mn to launch a cross-border e-commerce warehouse in the bonded area in Qingdao. By cooperating with Guangzhou Customs, Vipshop combines order, delivery, and payment information into one single ticket, and shares the ticket information with Customs, which largely accelerates the process of custom clearance. In terms of product offerings, the global sales business mainly focuses on standard products, such as accessories and handbags, which are low in return rate and have less uncertainty as far as the custom clearance process goes. Standard products, to some extent, could improve the shopping experience and lower the operational risks in the overseas online shopping business. In addition, Lefeng launched its overseas shopping pilot programme on 19 September 2014, which initially focuses on healthcare direct selling brands, such as Amway and Herbalife. Lefeng pre-ships merchandise from overseas to its onshore warehouses in the free trade zone (FTZ) or bonded area, and then sells those goods on the overseas shopping section of its website. When a consumer orders online, Lefeng can directly ship the products from the free trade zone or bonded area to the consumer with limited personal postal articles tax.
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Figure 66: Vipshop Figure 67: NetEase Kaola
Source: Company website Source: Company website Netease Netease also launched its overseas shopping platform Kaola in January 2015, and adopted delegated B2C merchandising and B2C marketplace models to provide overseas products in various categories, such as baby and maternity, cosmetics, and personal electronics. It also provides customers with "7 days free return" after-sales service. In order to ensure the quality of overseas shipping, Kaola cooperates with Sinotrans on warehousing, logistics, and customs clearance. The company has larger bonded warehouses in Hangzhou, Ningbo and Zhengzhou than most of the other e-commerce retailers, and is continuously improving its delivery efficiency. O2O service e-commerce Apart from physical goods, the younger generation in China also embraces the recent The younger generation in wave of service sector digitisation. We have witnessed strong online adoption in restaurant China also embraces the catering, food delivery, ticketing, transportation and life service categories. recent wave of service sector digitisation The O2O industry chronicle: How it started and where we are now
■ Group-buying era The attempt to digitise life service categories began with the emergence of the group-buy Digitisation of life service wave back in 2010. The high-frequency restaurant and catering segment became the first categories began with the to embrace the new business model and attract foot traffic from online. emergence of the group-buy wave back in 2010 From 2010 to 2011, the group-buying sites ballooned from 154 in March 2010 to 3,907 in end-2011 and later 2,857 in 2012. Venture capitalists poured billions of RMB into this field. Group-buy companies also expanded into categories such as ticketing, hotel booking, and various life service categories. As one of the most frequently performed consumption activities, dining and ticketing were penetrated quite early, which then evolved through the group-buying business model to the current couponing and direct-discount business model. China users now increasingly look for (and use) coupons to pay for dining, even at the slightest discount. Leaders in these categories are those that survived the fierce battle of the group-buying frenzy: Meituan, Dianping, Nuomi and Wowotuan. They are now actively competing in the existing categories, gaining traction in the hotel and beauty categories, and entering food delivery and other entertainment-related categories as well.
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Figure 68: China group buying GMV growth
12.00 127% 130% 125% 140% 122% 109% 107% 104% 9.62 120% 10.00 103% 106% 105% 103% 99% 8.88 96% 7.70 7.77 8.01 100% 8.00 6.98 6.95 7.04 5.93 80% 6.00 5.46 4.83 4.84 60% 4.09 4.00 40%
2.00 20%
- 0%
Group Buying GMV (Rmb Bn) YoY Growth (RHS)
Source: Tuan800
■ Uber-led business model evolution During 2011-12, the group-buying sector started to consolidate. On the other hand, the Group-buying sector started mobile-enabled infrastructure started to build up, with smartphone proliferation, maturity of to consolidate during 2011- 3G broadband as well as completeness of mobile payment and local based services. The 12 emergence of Uber and its innovative business model set a good example and marked the start of the new wave. In mid-2012, leading taxi-hailing apps, Didi and Kuaidi, started their business following the success story of Uber. Leading companies started the hard work of on-the-ground promotion as well as merchant and user education. In 2013, the Uber-like business model proliferated in various service categories. Didi and Kuaidi received large funding from venture capitalists and major internet giants, and started to consolidate the taxi-hailing sector.
■ The proliferation of various O2O service categories In 2014, platform companies such as 58 and Ganji started to enter specific categories to We foresee that proliferation facilitate transactions, and make various investments in multiple categories in the sector. of smart devices will enable Tencent and Alibaba continued and expanded investment into the O2O sector. more usage scenarios and propel the O2O service Didi and Kuaidi burned significant amounts of capital to subsidise drivers and users. As a economy in the future result, the user base and order volume elevated to a brand new level. Regulation started to become a concern. In 2015, Didi and Kuaidi merged and expanded into high-end car rental and business services. Leaders in specific categories started to build up scale and capital advantages to further acquire market share. Baidu announced its grand investment plan into O2O. Leading companies continued their investments in various categories in the sector. Beyond 2015, in the next two to three years, we foresee that proliferation of smart devices will enable more usage scenarios and propel the O2O service economy to the next level. Key value-adds for young Chinese The new, Uber-like transactional-oriented platform offers the following key value-adds to The new transactional- participants along the value chain. oriented platform offers key value-add to young Chinese
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(1) Dis-intermediation The new model bypasses the traditional intermediary agencies, and directly connects consumers and service providers. The elimination of the agency layer would scale up business at the national level (from previous local level), optimise cost structure and provide more competitive pricing. This should further consolidate the service distribution chain. A winner-takes-all scenario is very likely to happen in each category. (2) Efficiency enhancement for both consumers and service providers. In the PC era, this was partially done by digitising the information from agency companies and consumers, to scale up and expedite information exchange. In the mobile era, the matching efficiency and capacity utilisation are further enhanced with the elimination of the agency layer, and real-time availability matching at the lowest granularity. (3) Significant service quality improvement The mobile-enabled evaluation and feedback loop help to govern the service quality of the overall system. Service providers with better service quality will be rewarded with more business and better track records to be upgraded to more advanced service categories. While serving as a platform, major O2O players also actively engage in creating and maintaining de-facto in-house service provider teams, in order to elevate the service quality of core categories and maintain key customer experience elements during the entire service fulfilment process. Young Chinese consumer's behaviour towards online food delivery Today, young Chinese, particularly the "post-90s", are expected to be a driving force for Young Chinese are O2O service consumption. Online food delivery is one the most frequently ordered and expected to be a driving broadly demanded O2O service that is well-accepted and welcomed by campus students force for O2O service and young white-collars. According to a iResearch's recent survey on users who order consumption food online, 56.4% of the 19-24 group has used O2O food delivery services, higher than the 50% of the 25-35 group and other age groups. Meanwhile 61.8% of the student group has ordered food online, higher than the corporate staff group (46.5%). The post-90s tend to be less willing to cook than the older generations and they enjoy more convenient dine-outs and food delivery. Campus students have few dining options other than the student canteen, and the online food delivery platform gives them a broader variety of food to choose from; they are also very attracted by the convenience of "To- door" delivery which increases their order frequency and order size significantly. However, price sensitivity and lack of customer royalty [loyalty?] remain two major challenges in this user segment. The growing white collar segment also has high demand potential for O2O food delivery services due to their busy lifestyle. Given their stronger purchase power, food quality and safety remain their top criteria other than price. China catering and food delivery market China's catering/dining-out market has experienced steady growth of over the past few There was steady growth of years and reached ~Rmb2.79 tn in 2014. It is expected to continue with an annual growth China catering/dining-out rate of ~10% between 2014 and 2017, driven by the increase in disposable income and market change in lifestyle.
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Figure 69: Urbanisation and dining out—long term Figure 70: Growing disposable income driving higher support catering sales 50% 70% 59% 60% 57% 55% 56% 60% 45% 53% 54% 50% 51% 48% 47% 50% 40% 40% 35% 30% 30% 20% 25.8%26.5% 24.4%25.1% 23.2%23.8% 25% 23.0% 22.5%22.8% 10% 21.6% 22.3%
20% 0% 2008 2010 2012 2014 2016E 2018E Out-dining % of population (LHS) Urbanisation rate (RHS)
Source: NBS, Frost & Sullivan Source: CEIC, NBS, Frost & Sullivan According to Frost &Sullivan, China's urban population is expected to grow at a CAGR of 2.7% from 2013 to 2018 to reach 833.4 mn by 2018 with an urbanisation rate approximately 60%. With the growing middle class urban population, increasing disposable income and urbanisation, consumers dine in restaurants more frequently, contributing to catering sales in China.
Figure 71: China catering market size forecast Figure 72: China food delivery market size forecast 4,000 18% 16.5% 3,748.2 400 9.0% 10.0% 3,500 3,412.7 16% 350 8.1% 3,092.5 13.3% 14% 7.0% 337.78 8.0% 3,000 2,786.0 300 276.55 2,539.2 5.8% 11.0% 10.4% 12% 250 2,500 2,328.3 9.7% 9.8% 216.03 6.0% 9.1% 4.9% 2,054.3 10% 200 4.1% 2,000 1,763.6 3.6% 162.17 8% 3.3% 150 125.05 4.0% 1,500 6% 95.55 100 73.95 1,000 58.56 2.0% 4% 50 500 2% 0 0.0% 0 0% 2010 2011 2012 2013 2014 2015E 2016E 2017E 2010 2011 2012 2013 2014 2015E 2016E 2017E
Catering Market Size (Rmb Bn) YoY Growth (%) Food delivery market size (RMB Bn) % Penetrationin total catering market
Source: NBS Source: iResearch According to recent research, food delivery has become an important way to dine in China and the market has reached Rmb162 bn, accounting for 5.8% of the total catering market in 2014. By 2017, this penetration rate of food delivery is expected to be 9.0%, leading to a market size of Rmb338 bn with c.30% annual growth rate over the next three years (2014-17E). Food delivery penetration comparison Food delivery has been widespread in developed markets such as the US. According to China is expected to reach the National Restaurant Association, restaurant industry sales reached US$636.3 bn with 9% delivery penetration by nearly 1 mn catering firms nationwide in 2012. Among that, food delivery accounted for 2017 ~11% of the total catering market with a size of US$67 bn. The UK takeaway food market was valued at £4.4 bn in 2013. The online ordering channel has increased its penetration of the orders taken within the overall takeaway delivery market which has been in line with the retail sector trend as a whole. During 2009 to 2013,
Young China 43 28 October 2015 the penetration of e-commerce as a share of total retail spend increased from 6.6% in 2009 to 10.4% by the end of 2013. China currently has a lower delivery penetration of 5.8% in 2014, and is expected to reach 9% by 2017, suggesting potential room to grow in the future. Moreover, as online-to-offline services have been increasingly adopted by enterprises and users, O2O food ordering is also booming. The market grew at 182.2% annually from 2010 to 2014, and is worth c.Rmb10 bn in 2014. It is forecasted to expand rapidly by 64% per year to achieve c.Rmb42 bn by 2017, with the penetration in total O2O catering market increasing more aggressively from current 9.8% to 19.2% in 2017.
Figure 73: China O2O food delivery market size forecast 60 19.2% 20% 16.3% 12.8% 50 9.8% 6.7% 12.4% 10% 10.7% 3.5% 8.4% 1.6% 2.2% 40 5.9% 41.75 3.4% 0% 0.6% 1.5% 0.3% 29.51 30
-10% 20 18.23
9.51 -20% 10 4.23 1.44 0.15 0.46 0 -30% 2010 2011 2012 2013 2014 2015E 2016E 2017E
O2O food delivery market size (Rmb Bn) % Penetration in total food delivery market O2O food delivery as % total O2O catering market
Source: iResearch Growth drivers (1) A fast growing user base due to change in people’s lifestyle: Due to an increase in Four growth drivers for O2O disposable income and a lower desire to cook at home (on their own) as well as the fast food delivery pace of life, there is a strong demand for fast and convenient dining experience from busy white-collars and university students who also seek economic, diversified dining options other than student canteens. Food ordering services have been increasingly favoured and adopted by customers born in the 1980s and 1990s as they are considered faster (than dining in a restaurant) and more convenient (than cooking at home). (2) An increasing and wide use of O2O service especially due to the mobile internet boom: As mobile internet develops rapidly and the concept of O2O spreads out, successful group-buying online platforms such as Dianping.com first triggered the O2O catering market and helped to form user habits of adopting online services. As the user base expands, sub-segments such as O2O food ordering emerges and become prominent these days because users have been addicted to the convenience of online services. (3) Demand from restaurants to increase order volume: Limited by the physical space, location and business hours of restaurants, merchants wish to increase revenue by offering food delivery services. Large fast food chains such as KFC, McDonalds, Yoshinoya were the first providers of online ordering services (through their self-operating platform) and equipped with their own delivery staff. More importantly, non-chain restaurants or smaller merchants tend to seek third-party platforms (e.g. ele.me, meituan.com) to gain extra food delivery orders without establishing their own online operations.
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(4) Investors continue to have appetite for O2O investment: O2O remains a popular investment area favoured by VCs and the China’s internet giants. O2O food delivery appears to be a growing segment with a great market potential and substantial size. The continuous capital support enabled O2O food ordering providers to expand their service networks and establish in-house logistics teams and to quickly attract more customers and orders by offering discounts.
Value chain analysis The online food delivery service providers play an intermediary role and connect the Online food delivery service demand between users (customers who wish to order food) and merchants (restaurants providers play an which offer food take-outs). They establish online platforms which exhibit the restaurants’ intermediary role between offerings of food delivery and all relevant information such as customer reviews. The users, users and merchants either through their PC or mobile devices, place orders or pay on the online platform, and then the food will be delivered to them either by the restaurant’s delivery staff or the platform’s own logistics team. Under the “B2C” model, the third-party platform holds a relatively powerful position by charging the advertising fees and commissions for the orders made through the platform from the “B” end, also charging delivery feed from the “C” end (if it is delivered by the platform’s own deliverymen). However, it is noticeable that the platform appears to be less attractive to small (mom-and-pop) restaurants with very low margin who are concerned that even additional delivery orders may not cover the charges and further squeeze their tiny profit, or very well-established large restaurants which focus on high-profit orders from dining-in customers rather than scattered, lower- profit food delivery orders.
Figure 74: China online food delivery value chain overview
Source: iResearch
Market segmentation based on target customers China’s O2O food delivery market can be divided into three major segments according to University students, white- the user types: university students, white-collar and residential customers. The student collar and residential segment has been penetrated heavily and can be considered relatively saturated. The customers are three major other two types of customers are expected to have higher loyalty, be less sensitive to price segments of China's O2O than the students, leading to higher profit margin. Favoured by online food delivery food delivery market providers, these segments are experiencing fast development and have greater growth potential.
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Figure 75: Market segment comparison
Source: Analysys Competitive landscape Business model Among the O2O food delivery market, there are two major types of players: self-operating Two major types of players platform providers and third-party platform providers. The former typically refers to some in the O2O food delivery large-scale fast food chains such as KFC, McDonalds and Yoshinoya, who operate market : self-operating through their in-house online food ordering and delivery systems (e.g. McDelivery™). It platform providers and third- can be generally considered as an upgrade from the call centre system and is suitable for party platform providers large and capable chained restaurants which wish to have internal control on the orders and standardised service provided. More significantly, third-party platform providers are the “rising stars” and dominant players in the online food delivery industry, because their emergence allows various kinds of restaurants to participate in the O2O market and on the side, offering the users more options on a single platform. These will be the focus for the rest of the report. Third party platforms can be further segmented into two categories depending on their logistics capability (1) under the “light platform” model, third-party platforms such as Meituan.com and Taodiandian focus on the exhibition of restaurants information, and help merchants to generate customer traffic; however, they do not provide the delivery service, orders are either delivered by the restaurants, by third-party distribution specialists, or self- collected by users. This model saves money and time for various restaurants from building their own online business but focuses on taking orders and delivery; it enables the third- party platform to expand quickly without establishing its own logistics system, but the low entry barrier is a potential concern, such as unqualified restaurants being added on and a lack of quality control on delivery service. (2) The “heavy platform” model requires the third party platforms (e.g. Daojia.com, to have its own logistics system. Orders are made on the online platform and then sent to the restaurants, the platform’s deliverymen collect the food from the restaurants first before delivering to the customers. Some heavy platforms connect with the light platform in order to share user information. The heavy model benefits the restaurants by significantly lowering their labour cost (to hire their own deliverymen). The superior delivery quality the platform provides is highly recognised by the branded-restaurants, making the charging
Young China 46 28 October 2015 model from both “B” end and “C” end more acceptable. One of the problems with the heavy model is the relatively slow geographic expansion in terms of restaurant coverage. Also, the cost burden of maintaining a logistics team during non-peak time needs to be balanced with higher volume and profits from orders. Leading players' positioning and presence (1) Ele.me is an online food ordering site founded in Shanghai in 2009. The company currently serves 260+ cities, with 20 mn users and 200,000 restaurants using its platform. It also claims that in 2014, its total order volume reached 110 mn, with 1 mn orders accepted on average per day (source: company announcement) and 75% of the orders were made through the mobile apps. Ele.me initially targeted university students and the low-end catering market. The company plans to enhance its position in the campus segment, while increasing its penetration into high-end markets with focus on white-collar and residential customers who have higher affordability. It has constructed its in-house logistics system in order to improve delivery service quality. As it continues to cooperate with small-medium merchants via the light platform model, ele.me has successfully attracted 7,000 branded members including large fast food chains and mid-high end restaurants in 16 cities, supported by its own 2000+ deliverymen. By further leveraging the resources from Dianping and JD.com ((its strategic investors), the company aims to enhance the in-house logistics system in order to possibly expand its service scope other than just food delivery in the future. At the same time, using third-party distribution specialists such as DaDa (达达) and RRKD (人人快递) supports ele.me’s restaurant coverage and geographic expansion. (2) Meituan Food Delivery is the online food ordering service offered under the group- buying site Meituan.com, which has nearly 50% market share of the Chinese group-buying sector. It has strong competitive advantages in building wide relationships with merchants and through running an offline marketing campaign, it strengthened its brand reputation. Launched in late 2013, this platform grew rapidly by expanding into more than 200 cities within a year. Meituan Food Delivery heavily focused on the university student segment, competing with ele.me in the campus “food delivery subsidy war” in 2014. This strategy helped Meituan to gain significant market share in the sector and fast expansion geographically through the light platform model. It primarily attracts medium-small merchants on the platforms by leveraging resources through the group-buying site. However, the food ordered is currently delivered either by merchants themselves or third-party delivery teams. The quality of the food as well as the delivery service is considered difficult to supervise. (3) Baidu Food Delivery is an online food ordering platform created by Baidu. It leverages Baidu’s search engine advantage, and is also supported by Baidu Map and Baidu Nuomi to gain more customer traffic. Though entering the market late, Baidu has expanded into 84 large cities by now. Different from ele.me and Meituan Food Delivery, Baidu Food Delivery largely targets the mid-high tier market—the white-collar workers. Similar to ele.me, it built up the online platform and focused on connecting with premium merchants and branded restaurants such as Starbucks, Yoshinoya, as its white collar customers have higher requirements on food quality, safety and restaurant brands, but also are willing to pay more for these. In order to secure delivery speed and optimise customer experience, Baidu also constructs its in-house logistics force called “Baidu Knights” so the merchants can choose either using Baidu’s deliverymen or using their own. In addition, Baidu is an open platform which also connects with other third-party food ordering systems to share user information.
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Figure 76: Leading players positioning overview
Source: Analysys Market share According an Analysys report published in August 2015, Meituan has surpassed ele.me Four largest players and has gained the largest market share of 41.2% (by number of orders) in China's online achieved over 90% of the food delivery market, followed by ele.me (38.75%), Baidu (7.95%) and Taodiandian total market share (Koubei) (3.51%). The four largest players achieved over 90% of the total market share. In addition, market share by segment shows that the university students market has higher degree of concentration and is primarily dominated by ele.me and Meituan, while the white-collar and residential customer segments are more fragmented with more competitors coming in to broaden the market continuously.
Figure 77: Market share by order number Figure 78: Market share by GMV
Meituan Waimai 41.24% Meituan Waimai 34.49%
Ele.me 38.75% Ele.me 33.47%
Baidu Waimai 7.95% Baidu Waimai 12.70%
Taodiandian 3.51% Taodiandian 4.05%
Daojia.com 0.60% Daojia.com 2.43%
Others 7.95% Others 12.86%
0% 10% 20% 30% 40% 50% 0% 10% 20% 30% 40%
Source: Analysys Source: Analysys
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Figure 79: Key players market share by segment 100% 6.6% 8.0% 90% 3.2% 3.7% Others 16.9% 80% 3.0% 70% 47.3% Baidu Waimai 60% 47.9% 34.5% 50% Taodiandian 40% 11.0% Meituan 30% Waimai 20% 38.6% 10.2% 37.6% Ele.me 10% 4.6% 6.9% 0% Universy students White-collars Residential customers
Note: based on order numbers in 1H15; Source: Analysys The user data from mobile orders indicates that Ele.me, Meituan have more active mobile users than Taodiandian and Baidu Food Delivery, and also achieved longer average visit duration (per day).
Figure 80: Number of active users using major O2O food Figure 81: : Daily average length of visit duration on major ordering APP O2O food ordering APP Number in thousands Unit: minutes
16,000 454 207 521 14,000 1,221 Ele.me 6.9 807 1,065 12,000 10,000 5,283 6,796 5,633 Meituan Waimai 6.4 8,000 6,000 Taodiandian 2.0 4,000 7,676 6,381 6,653 2,000 0 Baidu Waimai 3.3 Nov-14 Dec-14 Jan-15 Ele.me Meituan Waimai Taodiandian Baidu Waimai 0 2 4 6 8
Source: Analysys Source: Analysys Sector implication and stock picks Baidu's O2O outlook. We maintain our view that Baidu's technology advantages (maps, 58.com is our top pick within voice search and local search) would differentiate it from other O2O players and achieve the China O2O service e- meaningful market share. This advantage remains, even if Tencent or Alibaba contribute commerce sector more users/traffic resources to the combined entity. Maintain OUTPERFORM. Our DCF- based TP of US$203 implies 34.3/22.4 FY16/17 P/E. Within the China O2O service e-commerce sector, our top pick is 58.com (WUBA US). We expect early cost synergies should emerge with 2Q15 S&M being much lower than our estimates. Excluding 58 Home, the core classified business was almost at break-even in 2Q. We conservatively estimate core WUBA+Ganji will generate FY16 non-GAAP OP of ~US$100 mn. New businesses, 58 Home and Ganji Haoche, should remain significant cost drags in both FY15 and FY16. We expect 58 Home/Ganji Haoche to lose US$200 mn/US$150 mn in FY16.
Young China 49 28 October 2015 New media Online ticketing becoming the No.1 channel David Hao +852 2101 7310 ([email protected] Fast development of online ticketing sector Online ticketing overtook In 2010, the first online seating selection website, Gewara.com, was launched. Fuelled by offline ticket sales as the both the boom in China's movie box office revenue and the rise in O2O, the online No.1 channel, with 66.5% of ticketing services sector has expanded exponentially in the past five years, recording total box office in 1H15 Rmb13.5 bn revenue in 1H15, compared with Rmb13.6 bn in the full-year 2014 and Rmb4.9 bn in 2013. In 1H15, online ticketing overtook offline ticket sales as the No.1 channel, with 66.5% of total box office. Its contribution was only 22.3% and 45.8% in 2013 and 2014, respectively. We estimate online ticketing to continue to grow, reaching Rmb84.3 bn in 2020, and accounting for 80% of the domestic movie box office. At the same time, growth in the online ticketing sector also stimulates the expansion in China's movie box office by the following means:
■ Providing convenience to customers in the ticket purchasing process.
■ Providing subsidy to ticket prices in order to attract price-sensitive customers.
■ Enabling seat selection in advance, which helps both the customer and the cinemas to lock in the service beforehand.
■ Cultivating the movie watching habit, especially among internet users and the young generation. Online ticketing is of two types:
■ Online ticket selection: Customers select the specific movie cinema, movie, time slot and seats online when they book the ticket. Every ticket is individually priced.
■ Groupbuy: Customers buy a coupon for a cinema, but the movie and the time slot are not specified. Customers will go to the cinema to redeem the coupon. The availability of the movie and the seating is not guaranteed in advance.
Figure 82: Growth trend of online ticketing market Figure 83: % contribution to total movie box office revenue Rmb Bn 90.0 200% 90% 179% 84.3 78% 80% 75% 77% 80.0 180% 80% 72% 71.5 70% 70.0 160% 70% 60.0 140% 60.0 114% 60% 48.7 120% 46% 50.0 50% 38.0 100% 40.0 40% 29.0 80% 30.0 30% 60% 22% 20.0 31% 20% 13.6 28% 23% 40% 19% 18% 10.0 4.9 20% 10% 0.0 0% 0% 2013 2014 2015F 2016F 2017F 2018F 2019F 2020F 2013 2014 2015F 2016F 2017F 2018F 2019F 2020F
Online ticketing revenue y-y % contribution to total movie box office revenue
Source: Analysys Group, Credit Suisse estimates Source: Analysys Group, Credit Suisse estimates
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Figure 84: Market share of movie ticket channels (2Q15) Figure 85: Major business models and players
Business Model Major players
Groupbuy Baidu Nuomi, Dianping
Online ticket Gewara, Maoyan, Komovie, 31% 48% selection only Wangpiao, Spider , Maizuo
Online Seat Selection, E-commerce JD.com, Taobao Movie 48% Online Groupbuy, 21% Social/search Wepiao, Baidu platform (map+search+nuomi) 21% Offline, 31% UGC Mtime
Cinema Line Wanda, China Film
Source: Analysys Group Source: Credit Suisse research Fierce competition in online ticketing As the market expands rapidly, many new players will enter the online movie ticket seating The industry is very selection space, including vertically focused movie sales websites (such as Gewara, fragmented at the moment; Mtime, and Maizuo), e-commerce and O2O websites (such as Maoyan and Taobao), we believe there will be social media websites (such as Wechat), and cinema line self-developed websites (such consolidation in the next five as Wanda, China Film and Jinyi). The industry is still in the early stage and largely years, and 3-5 major players fragmented; by 2Q15, there were ~40 online movie ticketing websites in China, but less as the market matures than ten of them have total revenue > Rmb300 mn. In the past year, the three biggest internet players—Baidu, Alibaba and Tencent—have also entered the space. We are expecting more industry consolidation in the next five years, and three to five major players as the industry matures. In order to gain a bigger market share, these movie ticket websites compete by providing Online ticketing platforms large amounts of subsidies to customers with low ticket prices—at a loss. Typically, movie are in fierce competition with ticket websites, as a sales channel, agree on a fixed distribution price that they will pay to ticket price subsidies movie cinema lines (~Rmb30-35, depending on the bargaining power of the production studio, cinema line and movie ticket website). Any amount they charge above or below the fixed price would be at their own profit or loss. In order to attract customers, many websites offer ticket prices as low as Rmb1, Rmb9.9 or Rmb19.9. For the same ticket, if customers purchase on-site at the cinema, it would cost them over Rmb40-100.
Figure 86: Market share of major online movie ticket selection websites (2Q15)
Source: Analysys Group
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War between BAT (Baidu, Alibaba and Tencent) and other media giants The three biggest internet players in China—Baidu, Alibaba, and Tencent, also known as BAT, and media giants, "BAT"—along with other media giants, such as Wanda Cinema Line, Oriental Pearl and such as Wanda and Oriental Huayi Brothers, have all entered the online ticketing sector. We believe the capital support Pearl, have all entered the from these investors will continue to fund the movie ticket subsidy until the market online ticketing sector saturates with three to five dominant players. The involvement of these internet and media companies will also help online ticketing players to expand along the industry value chain. (1). Maoyan （猫眼）: market share–36%; cinemas covered–4,000; cities covered– 400 Maoyan.com, the biggest online ticketing seat selection website/application, is a subsidiary of Meituan. Meituan, known as "China's Groupon," is the largest e- commerce O2O services website offering local deals, and it is backed by Alibaba. On 8 October 2015, Meituan announced it will be merged with Dianping, "China's Yelp," which is invested in by Tencent with a 22% stake. As a result, Maoyan could have support from both Alibaba and Tencent going forward. We expect this support to include not only capital injection, which will support the continuous movie ticket subsidy and marketing activities, but also traffic and other resources. (2). Gewara (格瓦拉): market share–22%; cinemas covered–2,000; cities covered– 300 Gewara.com, the second largest player and the first online seating selection website, has received investment from China Media Capital (CMC), which is backed by Oriental Pearl Media. CMC is a private equity mainly focused on media and internet sectors, with investments in a large number of quality assets in upstream content providers, such as Time Warner, Oriental Dreamworks, Starry Production, TVB, China Sports Media and Infront. Oriental Pearl is the largest multi-channel video programming distributor in China; its parent company is Shanghai Media Group. Oriental Pearl and CMC have also co-invested in several deals together with Wanda Group, which owns the largest cinema line in China. CMC and Oriental Pearl will provide both upstream and downstream resources and connection to Gewara. (3). Baidu Nuomi （百度糯米）: cinemas covered–4,500; cities covered–418 Baidu's O2O arm, Nuomi, has made movie ticketing one of its key businesses for expansion this year. With traffic, technology and investment support from Baidu, Nuomi's revenue and volume have increased significantly. Nuomi offers both online seat selection and Groupbuy tickets. During its promotional event "3/7 Girls Festival" this year, Baidu Nuomi sold over a million tickets with a promotion price of Rmb3.7; this was six times the tickets sold on the same day last year and accounted for 15% of total box office in China on the date. 70% of those transactions were completed with Baidu Wallet. On "7/7" (China's Valentine's Day) this year, Nuomi sold 1.7 mn tickets, accounting for 25% of total tickets sold (6.8 mn) nationally on that day. In April 2015, Baidu issued membership cards together with SMI, Dadi, China Film, Poly, Bona, CGV, 17.5, Hengdian and several other cinema chains. All of the 100k cards issued on 1 May were sold out on the same day. The movie watching frequency of membership cardholders, 12 times per year, is significantly higher than the average frequency of the Chinese audience, which is 4.8 times per year. On 13 June 2015, Baidu established a strategic relationship with SMI Holdings, the sixth largest cinema line in China. Meanwhile, SMI has also announced it will stop selling tickets on Maoyan, the largest online ticketing website.
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At the end of June, Baidu announced it will invest Rmb20 bn in O2O (Nuomi) over the next three years. We estimate around 20% (Rmb3.8 bn) of that will be invested in the movie category. Baidu Nuomi has also organised other online and offline activities for its members to boost movie ticket sales. For example, on 21 September 2015, Baidu Nuomi, together with the "Lost in Hong Kong" movie production team, organised a special early showing of the movie and received great success. We believe Nuomi's market share will become one of the top 5 in the category very shortly. Baidu Nuomi's movie ticket market share has not been separately published by Analysys Group yet, as Baidu is one of the latecomers in the space. (4). Wepiao （微票儿）: market share–8%; cinemas covered–4,100; cities covered– 420 Weipiao is the third largest player with 8% market share and it is a subsidiary of Tencent. It is the official application of Wechat and QQ movie. As a result, it receives all the traffic from Wechat and goes through Wechat Wallet's payment system. (5). Taobao Dianying （淘宝电影）: market share–6%; cinemas covered–2,500; cities covered–244 It is the movie channel of Alibaba's e-commerce website Taobao, which is the largest C to C (customer to customer) website in China. (6). Mtime （时光网）: market share–6% Mtime is the largest all-rounded movie content and service platform in China. It has been invested in by Wanda Cinema Line with a 20% stake. Compared to other online movie ticket sales websites, Mtime is "effectively Fandango, IMDb, Rotten Tomatoes and Yahoo Movies rolled into one," as described by New York Times. Mtime has ~80 mn monthly active users, including ~65 mn mobile users. (7). Wanda （万达电影）: market share–5% It is Wanda Cinema Line's official online ticket sales website. Wanda Cinema Line has been the largest cinema line in China for six consecutive years with 14% market share. In 2014, over 60% of Wanda's box office revenue came through the online ticketing channels and 30% of that came from its own website/mobile application. Wanda also has the largest membership system in China with 40 mn members by end-1H15. We expect the market share of Wanda's own website/application to continue to see rapid growth as its box office and membership grows. The Wanda brand is creating stronger and stronger customer stickiness. (8). Maizuo （卖座网）: market share – 2% Maizuo is invested in by Huayi Brothers, with the controlling stake (51%) in June 2014. Huayi is the largest movie production company in China.
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Figure 87: Investment of major internet and media players in online ticketing
Source: Analysys Group, Credit Suisse research How customers choose ticket platforms? Consumers normally choose ticket platforms based on four factors, in our view. Customers choose ticketing platforms based on ■ Availability: The availability of a customer's desired movie and cinema is the first availability, price, priority, therefore, the coverage of a ticketing platform is very important, especially in convenience, and other Tier 3 and 4 cities. value-add services ■ Price: Chinese consumers are quite price-sensitive compared to consumers in mature provided. markets; therefore, we always see huge impact of pricing subsidies, especially for non-frequent movie watchers.
■ Convenience: The convenience for a customer to finish the transaction is the last mile to ensure the purchase. The transaction includes two parts—online payment and offline ticket pick-up. Some of the players, such as Maoyan, have installed offline ticketing machines in movie cinemas; hence, customers can print tickets using these machines instead of waiting in lines.
■ Other value-added services, such as offline events (special showing, celebrity meetings) and movie ratings. There are six major types of online ticketing platforms as summarised below.
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Figure 88: Summary of online ticketing business models Business Model Major players Pros and Cons Groupbuy Baidu Nuomi, Dianping These platforms typically offer both Groupbuy and online seat selection; for Groupbuy, customers can buy tickets in advance without confirming the movie and show time. With mature O2O and Groupbuy business model, these platforms have established customer base and offline sales resources; other services offered on their websites can also bring in movie tickets traffic. Online ticket Gewara, Maoyan, Komovie, As specialised platforms, these companies are good at online and offline marketing and selection only Wangpiao, Spider, Maizuo promotional events' organisation. Within the movie watcher community, they enjoy a high level of customer stickiness. E-commerce Taobao Movie, JD.com Movie ticket is one category on these e-commerce platforms, therefore, they get the traffic from the e-commerce website itself. Many customers have downloaded their mobile application and registered as users previously for their e-commerce services. These platforms also have mature and trustworthy payment systems in place. However, they might not have as much resources and experience for movie ticket subsidy and offline collaboration. Social and search Wepiao, Wepiao gets traffic from two of the largest social applications in China—Wechat and platform Baidu (Search+Map+Nuomi) QQ—both owned by Tencent. Users do not need to download an additional application and can use Wechat Wallet for payment, which adds to the convenience level. Baidu Nuomi receives traffic from Baidu map and search, two of the dominant applications in China in the map and search sectors. In 1Q15, 25% of Nuomi movie ticket transactions originated from and were completed on Mobile Baidu and maps. UGC (user Mtime, Douban Mtime is the largest all-rounded movie content and service platform in China, integrating generated content) movie ticket sales with movie ratings and audience comments. Users of these websites have a high level of loyalty, stickiness and consumption frequency. The recommendations on these websites further stimulate users' movie watching behaviour. Cinema line Wanda Cinema-line-owned ticketing platforms usually only offer tickets of their own cinemas and provide convenience to members. However, only the big cinema lines, such as Wanda, have the ability to do so given the limited number of cinemas such websites can offer. Source: Credit Suisse research Near-term, subsidies remain high According to our estimates, the subsidy from e-commerce and movie studios totalled around Rmb4 bn in 2014; this accounted for 13.5% of the total movie box office in China. The subsidy from e-commerce platforms alone was around Rmb2 bn, which accounted for 14.7% of the online box office in China. We estimate the total subsidy to be Rmb8.4 bn, Rmb8.3 bn, and Rmb6.7 bn in 2015, 2016 and 2017, respectively. The total subsidy level will peak in 2015 at 20%, and slow down going forward. E-commerce subsidy is estimated to be Rmb4.6 bn, Rmb4.6 bn and Rmb3.4 bn in 2015, 2016 and 2017, with subsidy levels of 16%, 12% and 7% as a percentage of online box office, respectively. Currently, the split is 50-50 between the movie production company (as marketing expense) and the online ticketing platform. However, for big production movies or well- known movie studios, the split may be 1:2 or 1:3 depending on their bargaining power. Some movie studios, which are very confident about their production or have budget constraints, may even refuse to contribute to the movie subsidy. The subsidy is usually provided during the first 3 days of a movie's release in order to boost the popularity of a movie; the box office in this period also significantly impacts the scheduling in the following days. For example, Lost in Hong Kong (港囧), a movie produced by Enlight Media and released on 25 September 2015, has recorded Rmb1.6 bn in box office so far, out of which at least Rmb0.1 bn is from the e-commerce subsidy (6% of total box office). The lowest price for Lost in Hong Kong was Rmb9.9 on Maoyan, Rmb9.0 on Wepiao and Rmb6.6 on Baidu Nuomi, which is at 72%, 74% and 81% discount, respectively, to the movie's average ticket price of Rmb35.
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Figure 89: Production company and e-commerce subsidy trend Rmb Bn 5 18.0% 4.6 4.6 5 16.0%
4 3.7 3.7 14.0% 3.4 4 3.2 12.0% 3 2.4 10.0% 3 2.3 2 2 8.0% 2 1.4 1.4 6.0% 2
1 4.0% 0.5 0.5 1 2.0%
- 0.0% 2014 2015F 2016F 2017F 2018F 2019F 2020F
Production company subsidy e-commerce subsidy Production company (as % of total box office) e-commerce (as % of online box office)
Source: Company data, Credit Suisse estimates
Figure 90: Subsidy as % of total box office (2014) Figure 91: E-commerce subsidy as % of e-commerce box office (2014)
14% 16%
Non-subsidized Box E-commerce Box Office, Rmb 26Bn Office, Rmb 11Bn Total Subsidy, Rmb 4Bn E-commerce Subsidy, Rmb 2Bn 86% 84%
Source: Credit Suisse research Source: Credit Suisse research
In our view, subsidies from online ticket platforms are likely to stay in the medium term due We believe subsidy will to the following reasons: remain in the medium term (1). Market is still fragmented, (2). BAT (Baidu, Alibaba, and Tencent) are focusing on the entertainment space, and (3). Movie is a good category to attract customers for other O2O categories. For example, customers who purchase movie tickets on Baidu Nuomi will use Baidu Wallet; at the same time, the user will create a user account and is more likely to use other O2O services, such as restaurant Groupbuy, or other entertainment services. What's the impact, if subsidy stops in the long term? In the long term, when the market is consolidated with 3-5 dominant players, the subsidy will decrease or stop eventually and the market will grow organically, in our view. Impact to box office: We believe the impact to the total movie box office revenue in We think the impact to China will be small for the following reasons: China's movie box office will be small if subsidy stops ■ With increasing disposable incomes, movie watching is now an affordable activity instead of a luxury; customers are becoming less price-sensitive. Movie tickets in China are still largely cheaper than other regions—the average ticket price in China is Rmb35 vs Rmb60 in HK, Rmb50 in Singapore, Rmb56 in Taiwan and Rmb50 in the US.
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■ Movie watching has become a major offline entertainment for the younger generation; frequent movie watchers who have formed the habit will not move away from watching movies.
■ Some of the customers may move from online ticketing to offline retail, which will not negatively impact the total box office.
■ The average ticket price will increase as a result. Impact on online ticketing platform: We believe the impact on online ticketing platforms We think the impact to will also be marginal. The online ticketing service not only provides price discounts, more China's online ticketing importantly, it provides convenience to customers by enabling them to purchase tickets platforms will also be and select seats in advance. It also streamlines the payment process—customers do not marginal have to wait in lines at the cinema to buy tickets. The online ticketing service has changed customers' behaviour and cultivated in them a movie ticket purchasing habit. Once the habit is formed, it will become a new norm, especially for the younger generation. According to Entgroup, the average age of the movie-going audience in China is 21.5. In other words, the majority of the audience is in their teens and young adults who use internet as an integral part of their life. The merger between Kuaidi and Didi—two of the biggest car-hailing applications—is another reference. Before the merger, the two companies were in an intensive battle for market share by providing subsidies to users. Within two to three years, China taxi app users exceeded 150 mn (3Q14). The two companies have reduced subsidy after the merger; however, users continue to use their application. Similar to online ticketing, taxi apps also provide convenience and have changed people's lifestyle. Potential market size for online movie ticketing In mature markets, instead of offering discounts on movie tickets, online ticketing platforms We think service charge will usually charge a service fee (5-10% of ticket price) on top of the ticket for the seat be a new revenue stream selection service they provide. for online ticketing platforms in China in the future We think this will be the trend in the long term: service charge will be the major revenue driver for online ticketing platforms. However, in the short term (next 2-3 years), given the market is still in the development stage, the industry is segmented and Chinese consumers are highly price sensitive, online ticketing platforms will not charge a service fee, in our view. With capital support from their investors—major internet, media companies and venture capital—online ticketing platforms will continue the battle with heavy subsidies.
Figure 92: Potential market size of online ticketing service Figure 93: Service fee charged by country fee (assuming 5% take rate) Rmb Bn 4.5 4.2 Service Charge Online ticketing platform 4.0 3.6 3.5 AMC and the Sky official ticket 3.0 3.0 Hong Kong HK$8 website 2.4 2.5 US US$2.7 tickets.fandango.com 1.9 2.0 £0.6 (movietickets.com) or £0.75 1.5 1.5 UK (booking.myvue.com) 1.0
0.5
- 2013 2014 2015F 2016F 2017F 2018F
Potential Market Size of Online Ticketing Service fee (Rmb Bn) (Assuming 5% take rate)
Source: Company data, Credit Suisse estimates Source: Credit Suisse research
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Online video: new broadcasting and advertising channel Internet advertising as a growth engine for the advertising market Along with the growth in China's macro economy and development of the media industry, We estimate internet China's advertising market has been growing with an 18% CAGR from 2009 to 2014, advertising to reach reaching Rmb419 bn in 2014. Besides the healthy growing in the traditional TV segment, Rmb341 bn in 2017 and the growth is mainly driven by advertising on the internet. According to iResearch, China 54% of the total ads market. online advertising revenue hit Rmb165 bn in 2014, accounting for 37% of the total One of the key engines for advertising market, up from only 9% in 2009. the growth in internet We estimate internet advertising to reach Rmb341 bn in 2017 and 54% of the total ads advertising is the online market. One of the key engines for the growth in internet advertising is the online video video advertising segment. advertising segment.
Figure 94: China advertising market and internet Figure 95: Internet advertising revenue as % of total ad advertising growth trend market 700 60% 632 54% 600 557 50% 50%
500 478 44% 419 40% 37% 400 363 341 317 30% 31% 277 300 264 25% 229 208 186 20% 200 154 15% 112 12% 10% 100 78 9% 41 17 27 0 0% 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E
China Ad Market (RMB Bn) Internet Advertising (RMB Bn) Internet Advertising Revenue as % of Total Ad Market
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Online video vs TV channels: New favourite for advertisers While traditional TV channels still remain with the largest share of the advertising market Advertisers have been (36% in 2014), its pie has been decreasing as advertisers move to online video channels. moving to online video as a In June 2015, the MAU (monthly active user) for online video reached 509 mn and online new channel from traditional video accounts for 33% of monthly time spent of PC internet services. In China's Top 10 TV channels online advertising publishers by estimated ads revenue, two of the names, Youku Tudou and IQiyi are online video platforms. Benefits for video audience
■ Having a greater number and variety of content since the regulation is not as stringent as that for TV channels;
■ Being able to search and watch a drama at any time, and being able to use pause, replay and fast forward functions;
■ Fewer and shorter advertisements and having the option to pay to remove advertisements; and
■ Being part of a community with other audiences. Many websites offer a comment section and forums to discuss the content. Audiences can also get recommendations to other similar or upcoming programmes. "Video Instant Barrage" (弹幕) is another
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new product that has been increasing popular—users can comment and see other users' real time comment on the screen while watching the video. Benefits for advertisers
■ According to iResearch, the percentage of ads watched by online video audience is higher than TV audience by 20%. The length of TV drama is longer than online video audience, as a result, TV audience tends to switch to other channels or walk away from the TV. Online video ads are catered towards the customer's interest based on back-end big data analysis. Advertisements on TV channels are more repetitive compared to the online channel, which negatively impacts audience's interest in these advertisements.
■ Advertisements placed on the internet are more flexible on placement. Big data analysis of audience's habits helps to maximise the value adds for advertisers. We estimate online video We estimate online video advertising revenue to grow from Rmb 15.2bn in 2014 to Rmb advertising market grow to 43bn in 2017 with 41% CAGR. Rmb54 bn in 2018.
Figure 96: Online video advertising revenue growth trend Figure 97: Top 10 online advertising publishers by estimated ads revenue (1Q15)
45 42.6 0.6 56% 55% 40 50% 0.5 35 46% 32.2
30 41% 0.4
25 22.8 32% 0.3 20 15.2 15 0.2 9.8 10 6.7 0.1 4.3 Online video websites 5
0 0 2011 2012 2013 2014 2015E 2016E 2017E
Online video advertising (Rmb Bn) y-y growth
Source: Company data, Credit Suisse estimates Source: iResearch New revenue stream for TV drama studios TV drama is the dominant winner for online video users, accounting for 61% of the total Online video platforms open views, followed by variety show with 18% according to CMMR (China Mainland Marketing a new revenue stream for Research Co.). From January to May 2015, 13,000 dramas were broadcast through the 12 TV drama studios, acting as major video streaming platforms and received 115.43 bn views. Domestically produced an additional TV station drama attracted over 90% of total views. With the pressure from the "One Show Two Satellite" policy, many TV drama production studios are suffering from reduction in revenue. The internet channel opens a new broadcasting channel and revenue stream for them—acting as an additional TV station. The advertising revenue for Youku Tudou, IQiyi, and Sohu Video totals Rmb7.8 bn in 2014, which is greater than the biggest satellite TV, Hunan Satellite TV, who recorded Rmb7.5 bn revenue in 2014. Some drama studios have signed agreements with online video platforms for exclusive distribution rights One of the great examples is the success of The Journey of Flower (花千骨), which was produced by Ciwen Media and broadcasted on IQiyi (online video platform) and Hunan Satellite TV (traditional TV channel). IQiyi paid Rmb 75mn for the broadcasting copyright, contributing 45% of Ciwen's total broadcasting revenue, while Hunan Satellite TV paid ~Rmb 93mn—the total revenue for first round broadcasting of Rmb168 mn has already
Young China 59 28 October 2015 exceeded Ciwen's production investment of Rmb105 mn. The drama has received over 18 bn clicks by Sep 2015, averaging over 0.3 bn clicks per episode. In addition, IQiyi and Ciwen together published a mobile game for the drama; IQiyi has also signed a contract of Rmb26 mn for the exclusive online broadcasting rights of The Journey of Flower 2015 (sequel of the drama).
Figure 98: Revenue comparison of satellite TV channel and online video platforms Rmb Bn 8.0 7.5
7.0 6.4
6.0 5.0 4.8 5.0 4.5 4.1 4.0 3.3 3.0 3.0 2.6
2.0 1.5 1.1 1.0 0.7
0.0 Hunan Satellite TV Jiangsu Satellite TV Zhejiang Satellite Youku Tudou Iqiyi Sohu TV
2013 2014
Source: www.tvtv.hk, company data Battle for a bigger market share The online video sector is still segmented with fierce competition and consolidation. The The major online video top players, including Youku Tudou (21.1%), IQiyi (19.6%), Tencent Video (14.1%), Sohu players are all backed by Video (12.6%), LeTV (9.3%), Fun.tv (6.6%), and PPTV (4.7%), are all backed by major internet and media giants, internet and media giants. such as Alibaba, Tencent, Baidu, Sohu Youku Tudou fully acquired by Alibaba: On 16 Oct, 2015, Alibaba Group announced a non-binding proposal to fully acquire outstanding shares of Youku Tudou Inc., for US$26.6 per ADS. In total, Alibaba is expected to pay a net amount of US$3.5 bn (gross amount of US$4.6 bn) in all-cash for the remaining ~80% of total outstanding shares. The offer price represents a premium of 30.2% to the closing price of the ADS on 15 October 2015. The proposal is subject to satisfactory completion of due diligence by Alibaba and the negotiation of a mutually acceptable definitive merger agreement. Under Alibaba's proposal, Youku's founder, Victor Koo, would continue to lead the business as chairman and CEO. Alibaba and Yunfeng invested US$1.22 bn in Youku back in 21 May 2014, at US$30.5 per ADS, to acquire 18.5% of Youku’s stake back then. With full support from its management team and major shareholders, we expect the deal to go through smoothly. The deal will not fully change the competitive landscape of the online video space—the top 3 players each owned by one major internet giant in China (Alibaba’s Youku, Baidu’s IQiyi and Tencent Video). Content spending and budget competition level may continue to remain high in the near term.
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Figure 99: Market share of top online video platforms by revenue (1Q15)
Source: Analysys, Credit Suisse research Content acquisition spending likely to remain high in the near term: These companies have been spending aggressively on content acquisition—both increasing the number of titles/ episodes owned, but also pushing out the cost per title/ episode, especially for popular titles. For example, the price per episode for online broadcasting increased from Rmb1K in 2006 to Rmb10K in 2009, and over Rmb1 mn in 2014. According to Toutiao.com, the price per episode is ~Rmb5 mn for Grave Robbers Chronicles, and ~Rmb 1.6 mn for WuXinThe Monster Killer. Moreover, the online broadcasting right for Voice of China (中国好声音) increased from Rmb10 mn for Season 1, to Rmb100 mn, Rmb200 mn, and Rmb250 mn for Seasons 2, 3, and 4 respectively. Based on our estimation, the content acquisition cost for Youku Tudou, IQiyi, LeTV, and Sohu Video is Rmb3 bn, Rmb3.5 bn, Rmb2.5 bn, and Rmb0.76 bn in 2015, respectively. As a result of the high cost of content acquisition, most online video platforms are suffering from high operating cost and low or negative profit margin. In our view, in the near term, these online video players will not cut their content In the near term, these acquisition spending with cash flow from their parent companies. After industry online video platforms will consolidation, the market will be dominated by 3-5 major players. With customer stickiness not cut their content and more subscription-based revenue (instead of purely advertising), they will maintain acquisition spending healthy content acquisition instead of competition for price.
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Figure 100: Content acquisition cost comparison Figure 101: Voice of China online broadcasting right revenue Rmb Bn Rmb mn Non-exclusive: 6.0 300 Tencent Video Non-exclusive: 250 5.0 250 Tencent Video 4.0 200 200
3.0 Non-exclusive: 150 Sohu Video 2.0 100 100 1.0 Non-exclusive 50 0.0 10 Youku Tudou iQiyi Sohu Video SMG+OPM 0 Season 1 (2012) Season 2 (2013) Season 3 (2014) Season 4 (2015) 2014 2015 2016 Price of Voice of China online broadcasting right (中国好声音网络独播权)
Source: Company data, Credit Suisse estimates Source: Baidu Baijia, Credit Suisse research Rise of online exclusive videos Online exclusive videos started from user generated content; users of online video platforms would record their own songs, videos, short movies, and even TV dramas. Online video platforms are collaborating with drama studios on online exclusive productions. As third-party content acquisition costs rise and online exclusive videos receive increasing popularity, online video platforms will start collaborating with drama production studios on "self-production" videos that are exclusively distributed on the internet. For users, these online exclusive videos are -
■ Catered towards internet users, mainly teenagers and young adults between ages 15 and 30.
■ Great variety of content given they are not subject to approvals of SARFT which is often strict and takes prolonged time—online video only needs to be submitted to SARFT for record. For online video platforms, they benefit from:
■ Lower production cost and entry barrier: However, production cost has also been increasing recently to increase the quality of self-production online videos. Compared to third-party content acquisitions, the cost of self-production videos are still significantly lower.
■ More flexibility in the commercials: In additional to advertising revenue, online video platforms have been actively adapting the membership subscription model.
■ Adaption of Super IP: Online video platforms own the IP of these online videos and thus can develop other media products, such as movies, games, toys, to better utilise the IP and fan base. One great example is Grave Robbers' Chronicles (盗墓笔记), a drama series produced by H&R Century Pictures, which was aired exclusively on IQiyi.com every Friday. Within the first two minutes of broadcasting, the drama series received 24 mn clicks and within 22 hours, it received over 100 mn clicks. By Aug 2015, the total views of the show exceeded 2.2 bn, and its revenue exceeded Rmb100 mn (includes both advertising revenue and audience subscription fee). During the 2015 China Online Video Development Summit in Sep 2015, IQiyi announced its plan to produce 30+ online video dramas and signed contract for seven of them with IP owners. Ling Hun Bai Du (灵魂摆渡), produced by IQiyi and released on 28 February 2014
Young China 62 28 October 2015 received 300 mn views during the first two weeks; its second season will be released on 30 October 2015. We estimate the online exclusive video market to grow from Rmb3 bn in 2014 to Rmb22 We estimate the online bn in 2017. We also think there will be more collaboration between TV and movie studios exclusive video market grow with online video platforms. to Rmb22 bn in 2017.
Figure 102: Market size of online exclusive video (broadcasting rights only) 25.0 1.2
21.6 1 20.0
0.8 15.0
0.6 10.8 10.0 0.4 5.4 5.0 3.0 0.2
0.0 0 2014 2015 2016 2017
Online Exclusive Video Market Size (Broadcasting right, Rmb Bn) y-y
Source: Company data, Credit Suisse estimates
Figure 103: List of top online exclusive videos in 2015 Online Video Release Date Name English Name Platform Production studio 鬼吹灯 Ghost Blows Out the Light IQIYI Century Great Dragon TBD 盗墓笔记 Grave Robbers' Chronicles IQIYI H&R Pictures 6/12/2015 心理罪 Criminal Minds IQIYI Fenghuang Liandong Entertainment 5/8/2015 匆匆那年 2 Fleet of Time Sohu Video Sohu Video, Tianjin Jinhu Culture TBD 撞铃之彼岸花 Zhuang Ling Sohu Video Sohu, Ciwen Media TBD 他来了请闭眼 Love me，If you dare Sohu Video Sohu Video, SMG Pictures, Shandong Film Group, Daylight 10/15/2015 Entertainment 无心法师 WuXin：The Monster Killer Sohu Video Tangren Media 7/6/2015 暗黑者 2 Death Notify Season 2 Tencent Video Tencent Video, Ciwen Media 8/3/2015 执念师 Falling Down Sohu, PPTV Shanghai Juli Media,Tianjin Jinhu Culture, Shanghai Shili 3/16/2015 Production 仙剑客栈 Pal Inn Youku Tudou Yiqi Entertainment 6/16/2015 Source: Wechat, Credit Suisse research Potential market for member subscription revenue As the demand for online video increases, all the online video platforms have started exploring a new revenue stream: membership subscription fee. Membership fee has two types: (1) monthly or annual subscription fee: Members who sign up for this will be eligible to watch member only/ VIP videos; (2) on-demand movie subscription fee: The audience can pay to watch a specific movie. The first type is becoming increasing popular and adapted by majority of the platforms. Member-only videos are usually newly released or platform exclusively movies and dramas, so if the audience does not pay subscription fee, he or she would not be able to watch it on another platform. Moreover, online video platforms provide other value-add services such as free advertisements and member exclusive events. The initial trial of the membership model has been hard for a couple reasons: (1) online video users are used to watching videos for free; in many cases, users can find the same video on another platform for free; (2) some customers are price sensitive; and (3) the
Young China 63 28 October 2015 online payment process discourages some users. However, since 2014, with the rise of self-production and platform exclusive videos, membership subscription has started to receive more customer acceptance. We think membership revenue is entering into a time of fast growth and is becoming the new driver for online video platforms' revenue. We estimate its market to grow from Rmb1.4 bn in 2014 to Rmb11 bn in 2017 with 100% CAGR; by 2017, membership revenue will account ~14% of the total revenue of online video platforms. IQiyi, the second largest online video platform and a subsidiary of Baidu, has been the most successful in expanding its membership subscription. Its self-production drama Grave Robbers' Chronicles (盗墓笔记)released all of the episodes on 3 July 2015. The first four episodes are free for all while episode 5-8 are only open for IQiyi's VIP members. Within 5 minutes, the number of video playing requests exceeded 160 mn, and VIP membership request exceed 2.6 mn. Another drama, The Legend of Zu (蜀山战纪) was released at 8 pm on 22 September as member exclusive. Within 12 hours, the drama was viewed by 3.8 mn VIP members with total 14 mn views. On 14 October, IQiyi announced that it would spend 50% of its capital and resources in VIP membership business. Xianghua Yang, the Senior VP of IQiyi, also said membership subscription revenue will become the main revenue source for online video platforms. By June 2015, IQiyi's total paying members exceed 5 mn with 765% YoY growth.
Figure 104: Online video subscription revenue growth trend Rmb mn 12000 16% 14% 14% 10000 12% 10% 10930 8000 10% 8% 6072 6000 8% 5% 5% 6% 4000 3036 4% 2000 1380 690 2%
0 0% 2013 2014 2015 2016 2017
Video subscription revenue Subscription as % of total online video revenue
Source: iResearch, Credit Suisse estimates
Figure 105: Major online video platform subscription fee Subscription fee (Rmb) 1M 3M 12M Youku 15 39 119 Iqiyi 19.8 58 198 Tencent Video 20 45 150 Sohu Video 18 45 148 LeTV 18 54 198 Source: Company data, Credit Suisse estimates
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Stock calls: Cinema lines: Growth in online ticketing will support the high growth in China's box office revenue, and we believe cinema chains will be the biggest beneficiary. Wanda (002739 CH, OUTPERFORM, TP Rmb 203): Wanda Group is vertically integrated with a strong presence across China's box- office value chain. Wanda Cinema is the dominant player in the cinema business and leads in both box-office and non-box-office sales. Through international expansions, the group has become the largest cinema chain in the world with growing monetisation opportunities. Wanda also has an aggressive five-year expansion strategy with a clear roadmap and has unmatched highest operating efficiency among peers.
Young China 65 28 October 2015 Sports engines of growth: Professional + amateur David Hao +852 2101 7310 ([email protected] On 20 October 2014, the State Council released guidelines to boost China’s sports industry, expecting the sports industry to grow to Rmb5 tn by 2025 with a 24.6% CAGR. As of now, 11 provinces and cities have announced their respective regional sports policy measures, with the scale totalling Rmb2.5 tn. In our view, the growth stage of China's sports industry has arrived with government support as well as enthusiastic consumers. We estimate the sports industry will grow to Rmb3 tn in 2025, with a 19.4% CAGR. We expect the majority of the growth to come from sports broadcasting and event management. We like Century Sage Scientific in the sports broadcast space and Wisdom Sports Group in the event management space.
Figure 106: Expected growth trend for the China sports market
China Sports Industry Market Size
3,500.0 3,000.0 3,000.0 2,512.7 2,500.0 2,104.5 2,000.0 1,762.6 1,476.3 1,500.0 1,236.5 1,035.6 867.4 1,000.0 726.5 608.5 426.8 509.6 500.0 357.5
- 2013 2014F 2015F 2016F 2017F 2018F 2019F 2020F 2021F 2022F 2023F 2024F 2025F
Revenue (Billion CNY) Expon. (Revenue (Billion CNY))
Source: Company data, Credit Suisse estimates Professional sports: Increase and extract commercial value A key engine and revenue stream of the sports industry is the professional leagues. The Chinese Basketball Association (CBA) and China Football Association Super League (CSL) are the two most popular and profitable leagues. Other professional events include China League (Jia & Yi), FA Cup, Super Cup, China Badminton League (CBL), and the Open Golf Championship of China, China Open (tennis). Increasing price of football team broadcasting rights: To use China Football Association Super League (CSL) as an example, in 2014, the total revenue of CSL and all Broadcast rights is only a the teams totalled over Rmb2.4 bn. However, the media broadcasting revenue was only small portion of total Rmb50 mn, 2.1% of the total revenue. In 2013, CCTV paid CSL Rmb7.3 mn for the revenue, compared to broadcasting rights and sold advertisements for over Rmb90 mn in revenue. With more leagues from other countries flexibility in broadcasting regulations, the market should see cost escalation for broadcasting rights. We believe there is a potential for growth in this portion of the revenue. On 25 September 2015, China's national football team signed a contract with China Sports Media (CSM, 体奥动力) as its broadcasting and copyright partner from 2016-20 for Rmb8
Young China 66 28 October 2015 bn in total (Rmb1 bn per year for the first two years, and Rmb2 bn per year afterwards). CSM was founded in 2004. From 2011 to 2014, it was once a subsidiary of China Digital Culture Group Limited (中国数码版权集团). Currently CSM is independent and invested by the private equity China Media Capital (CMC), which is backed by Oriental Pearl Group. CSM has been the broadcasting partner for CSL since 2007, and started signal production and copyright distribution for AFC Champions League since 2009. It has also been broadcasting for CFA cup, China Super Cup, and FIFA Club World Cup (Guangzhou Hengda's games) since 2012. This price indicates significant increase compared to the CBL broadcasting rights in 2014 and guarantees to double in two years. This contract covers the following media copyright: (1). Procurement of event broadcasting signal production services. (2). TV broadcasting rights in mainland China. (3). New media broadcasting rights in mainland China. (4). All media rights outside of mainland China. Furthermore, the enhancement in the league's overall quality of viewing is another way to improve broadcast rights. Over the past year, CSL clubs have significantly increased Sports leagues, such as spending to get star players from other international leagues to CSL. According to a report CSL, are trying to boost the published by FIFA in March 2015, the total winter transfer fee for CSL amounted to quality of viewing to US$85.5 mn, which is ranked No.3 in the world, behind US$174 mn by the English increase the commercial Premier League and US$117.9 mn by Bundesliga (Germany A League). value
Figure 107: Price of CSL broadcasting right Figure 108: CSL—international winter transfer fee (Jan to Mar each year) Rmb mn 90 85.5 78.7 2500 80 2000 2000 2000 2000 70
60 1500 50 1000 1000 1000 40
500 30 25.1
36 50 70 20 15.6 15.9 0 2013 2014 2015 2016 2017 2018 2019 2020 10 Price of CSL Broadcasting Right 0 2011 2012 2013 2014 2015
Source: Company data, Credit Suisse estimates Source: FIFA
In comparison, some of the popular sports leagues have generated massive revenues Broadcast right fee for the from selling broadcast rights, as summarised below. For example, the latest broadcast Chinese sports leagues is deal for the English Premier League was worth ~US$2.6 bn each for three seasons. As significantly lower the commercial value of professional leagues in China increases, broadcast rights fees will grow in size.
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Figure 109: Summary of TV broadcast rights fee of major sports leagues worldwide Per Amount season Date League Purchaser Coverage Duration (USD mn) (USD mn) 2011-04 NHL NBC, Versus US 10 seasons 2,000 200 2011-12 NFL Fox, NBC, CBS US 9 seasons 28,000 3,111 2013-05 S. Korean K-League ??? South Korea 1 season 14 14 2013-09 Japan J-League ??? Japan 1 season 50 50 2013-11 NHL Rogers Canada 12 seasons 5,200 433 2014-02 LA Lakers (NBA) Time Warner Cable California 20 seasons 3,000 150 2014-10 NBA Turner and ESPN-ABC US 9 seasons 24,000 2,667 2015-02 English Premier League Sky Sports and BT SportsUK 3 seasons 7,892 2,631 2015-07 La Liga (Spanish A League)Telefonica Spain 1 season 668 668 2015 Italy Serie A MP & Silva Italy 4 seasons 829 207 2012 Germany Bundesliga 1 andSky 2 Deutschland FernsehenGermany 4 seasons 2,164 541 2016 France Ligue 1 Canal Plus cable tellevisionFrance broadcaster 5 seasons 3,380 833
2015-05 NBA Tencent China Online 5 seasons 500 100 2015-05 English Premier League Tencent, Sina, LeTV China Online 1 season 54 54 2015-08 La Liga (Spanish A League)PPTV China 5 seasons 280 56
2012 CSL (Super League) CCTV China 1 season 5 5 2013 CSL (Super League) CCTV China 1 season 6 6 2014 CSL (Super League) CCTV China 1 season 8 8 2015 CSL (Super League) Market bid China 1 season 114 114 2016 CSL (Super League) China Sports Media China 5 seasons 6,299 1,260 Source: Credit Suisse research Furthermore, according to AT Kearny's statistics, the sports performance industry comprises 10% of the sports industry, and football comprises 60% of the sports performance industry. Hence, the football industry has potential to grow to Rmb180 bn by 2025. Besides TV channels, internet video streaming companies are getting into the broadcasting business aggressively. In July 2010, Ssports signed an exclusive Internet video streaming broadcasting rights deal for China mainland and Macau with the English Premier League. platforms are also getting In June 2014, Ssports sold the one-year non-exclusive streaming rights of the English into the broadcasting Premier League to PPTV and LeTV for US$110 mn each. In each of the 38 rounds (ten business aggressively games each round), only four games are available for free streaming, and the rest are paid. The US$100 mn cost covers the free games, while the revenue from paid games will be shared between PPTV/LeTV and Ssports. As China's online streaming market and paying customers increase, the revenue from online broadcasting will also rise.
Figure 110: Sports management and broadcasting industry Right owners: sports leagues, pro tours, athletes, and teams Sell broadcasting and sponsorship rights
Sports management and media companies
Sponsorship and Talent representation Media: TV channels/ advertisement agencies Internet video streaming companies
Consumers
Source: Credit Suisse research
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Amateur sports: Mass fitness is becoming a new lifestyle trend The second engine is the amateur sports market. The number of professional athletes is relatively small and unlikely to grow significantly in the short term; however, China has a The population base for vast population that will participate in amateur sports activities. According to Wisdom mass fitness is tremendous, Group, there are 2 mn sports enthusiasts, 6 mn normal fans, 120 mn who have potential and yet to be explored. (young and urban population who also have the economic base), and 600 mn who will be influenced by other people to join sports and exercises. The 120 mn fans will be the main component of the amateur sports market. Golden age for Marathon has come: In 1981, Beijing organised the first international marathon in China, followed by Dalian, Shanghai, Xiamen, and other cities. After over 30 years of development, marathon has passed the seeding stage and entered a period of golden growth. Marathon events have Over the past two years, marathon events have become one of the most popular amateur gained tremendous sports and the participant number has increased exponentially. According to the Chinese popularity recently both Athletic Association, it organised 10, 22, 33, 44 and 51 marathons in 2010, 2011, 2012, among professionals and 2013 and 2014, respectively. The total participant number grew from 500,000 in 2012, to amateurs 750,000 in 2013, and over 1 mn in 2014. In recent news (sports.163.com), the 18,000 participant quota was filled within a few hours for Shanghai Marathon, which was launched on 15 September. During the first hour of registration, its website received 698,850 page views, and 38,000 peak number of visits per second. Moreover, Beijing Marathon used a lottery system for registration, with only a 14.2% success rate. We believe the rise of footrace and marathon is due to a combination of the following reasons: (1). Increasing focus on health and rising need for exercise As the living standards and disposable incomes of the Chinese population rise, people's focus has moved towards living a healthy and quality lifestyle. More and more people have started to participate in sports activities. (2). Low entry barriers Compared to other sports that require specific equipment and venues, footrace has lower barriers of entry and can be practiced by all age groups. Participants also have the flexibility in terms of personal running schedule, pace and location. The only cost associated for beginners is a pair of running shoes. (3). Emergence of social media The emergence of social media further stimulates footrace participants' interest by providing them with a community, where they can socialise with other participants with similar interests. Some of the popular footrace software includes Runner Mate, Runkeeper, Baobukong (跑步控), and the Joy Run (悦跑圈). The mass social applications, such as Wechat and Weibo, also facilitate footrace participants to share their progress and socialise with others. (4). Government support Many of the Tier 1, 2 and even 3 cities in China have successfully organised marathon events in the past, widening the reach of such events, as many of the participants travel around the country or even globally for marathon events. Commercially, organising marathon events will bring in revenue from advertising and sponsorship. More importantly, these events showcase the healthy living of a city, boosting its image.
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However, as a relatively young event, the organisation and execution of marathon events Government-organised still face a lot of challenges with lots of areas that need improvement. For example, in the marathon events still face Beijing Marathon that finished on 20 September, the food and water supply provided by lots of challenges in the organiser was insufficient. The number of washrooms was not enough, and as a result, management and execution, participants had to queue up for more than ten minutes. and have not maximised the Currently, the majority of the marathon events are organised by the government, the commercial value Chinese Athletic Association, or other non-profit organisations. As these organisations are not professional event organisers, they could not maximise the commercial value. Wisdom Sports Group is the only company managing marathon events commercially and professionally. In 2014, Wisdom organised two marathons (Guangzhou and Hangzhou), attracted 210K participants, 20 mn audience, 20 mn consumers, and 200 mn media coverage in terms of Wisdom has risen as a audience. The Guangzhou marathon was sponsored by GAC-Toyota and the Hangzhou successful and reputable marathon was sponsored by Intime. Wisdom is planning to organise five more marathons footrace organiser in 2015. We estimate Tier 1 marathon events will generate a revenue of Rmb50 mn in 2014 and Rmb60 mn in 2015, mainly from sponsorships and advertising revenues. We also expect more revenue coming from other value-added services, such as training for participants, and dining or other activities organised for the audience.
Figure 111: Total marathon participant number in China Figure 112: P/L analysis of Tier 1 marathon (e.g., Guangzhou) 1200000 (Rmb mn) 2012 2013 2014 2015F Revenue 13.0 30.0 50.0 60.0 1000000 Sponsorship 8.5 24.0 42.5 50.0 Others 4.5 6.0 7.5 10.0 800000 Cost (12.0) (11.0) (20.0) (26.0) Media Rights (CCTV) (3.0) (3.5) (5.0) (6.0) 600000 Operations & Others (9.0) (7.5) (15.0) (20.0)
400000 Profit 1.0 19.0 30.0 34.0 Margin % 7.3% 63.3% 60.0% 56.7% 200000
0 2012 2013 2014
Total Marathon Participant Number in China
Source: Sports.163.com Source: Credit Suisse estimates Need for more sports facilities: Building new sports facilities, especially the small- to medium-sized stadiums in Tier 3 and 4 cities and suburban areas, is one of the goals mentioned in 'the guideline'. Another goal is to develop exercise activities, such as running and walking, cycling, water activities, rock climbing, shooting, horse riding, and extreme activities, the majority of which are much more developed in the US and Europe than in China. The main revenue streams for the amateur market include (1) sports event organisation and management, (2) sports activity training schools and programmes, and (3) stadium operations and management. Wisdom Group, as a leading company of events management, has established strategic partnerships with 14 provinces, and planning for 1,300 events in 2015. The company has Wisdom Group is the leader organised marathon events in Shenyang, Changsha, Wuhan, Hangzhou, and Guangzhou in footrace event this year, with 210,000 participants, 20 mn onsite audiences, and 200 mn audiences management through the media. The company has also organised basketball, youth football, badminton, and other amateur events with great success.
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At the end of 2013, 16,946 sports stadiums were built, twice the number ten years ago. And the total usage area is 1.992 bn sq m, up by 50% compared to that in 2003. If both numbers see a CAGR of 10%, total stadiums will reach 28,312, totalling 26.87 bn sq m by 2025. Comparison with the US and Europe Historically, the sports industry in China has been closely regulated and managed by the General Administration of Sport of China and its associations (basketball, football, tennis, Historically, the sports golf, and others). Since the second half of 2014, developing the sports sector has been a industry is tightly regulated key strategic initiative at the national level. The government will step back from over- by the government, which regulation and open up the market for private investments, in our view. We expect rapid will now step back and open growth in sports event sponsorship, management and broadcasting, sports productions up the market and talent shows in 2015. In 2013, sports industry revenue in China was only Rmb357.5 bn, accounting for 0.6% of GDP. A majority of the revenue came from sports equipment and apparel manufacturing. Revenue of the US sports industry is around US$450 bn (roughly Rmb3.6 tn), ~10x of that in China. It accounts for roughly 3% of the US GDP, 5x that in China. The NFL alone generates US$10 bn annually, including US$5 bn from broadcasting, US$2 bn from sponsorship, US$2 bn from box office, and US$1 bn from merchandising products. The sports industry value chain includes before, during and after the events. The main revenue generating parts are event management and broadcasting rights. For event management, sports management companies buy rights from leagues, teams, pro tours, and athletes, and sell them to corporations for title sponsorship and naming rights. For broadcasting, media companies purchase broadcasting rights from leagues and teams and redistribute to TV channels and internet streaming websites. And they profit from advertisement revenue. Globally, for Europe and the US major leagues, broadcasting rights represent 40-50% of the total revenue while sponsorship and titling represent 30%. However, in China TV Broadcast rights usually broadcasting was strictly regulated by the General Administration of Sports of China, and make up 40-50% of a major only CCTV has the broadcasting rights. Therefore, broadcasting rights comprises only sports leagues' total roughly 2-10% of total revenue. With the new regulation, other TV channels can purchase revenue; however in China, and resale broadcasting rights which will increase this part of the pie significantly. it is only 2-10%
Figure 113: Comparison of China and the US' sport Figure 114: Sports event revenue breakdown industry revenue size (Rmb bn)
Revenue breakdown Sports Industry Revenue % of GDP
China Soccer 2% 90% 8% 357.5 0.60%
China Europe major leagues 40% 30% 30% US
3600 3% NBA/ English Premier League 50% 30% 20%
0% 20% 40% 60% 80% 100% 120% Media broadcasting rights Sponsorship and titling Gate Revenue and other merchandising products Source: General Administration of Sport of China, Credit Suisse Source: eeo.com.cn, Credit Suisse research research
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Stock call: Sports: The expansion in both professional and amateur sports market will drive the rapid growth in the sports sector. Wisdom (1661 HK, OUTPERFORM, TP HK$ 5.2) Over the past three years, Wisdom Sports Group has successfully transformed its business from a pure advertising agency to a reputable sports organisation in China. The company is currently the largest footrace organiser in China, and has also developed its self-owned IP events including "Season Run", "Walkathon", and "CBL Basketball Tournament".
Young China 72 28 October 2015 Young Travellers: Be spontaneous, be unique, be social Sophie Chiu +852 2101 7657 ([email protected]) When we talk about young Chinese, effectively we mean the generation born in the 1980s Young Chinese travellers and 1990s. Both of these generations were born under the one-child policy. They received take the lion's share of the maximum resources of the family. They also grew up as the centre of the family and travel market, becoming the therefore 'self' is very important in their consumer behaviour. main driver of this market The 1980s generation grew up in the early reform stage but matured in the modern era. Therefore they inherit the same traditional mentality but have also quickly adapted to the new trend. When they travel, they would display a combination of old and new tourism behaviour but they are much more open to the new concept/format of travelling. The 1990s generation grew up entirely in the post-reform era where social status is more segmented. Their tourism behaviour will be subject to the wealthiness of their family. In general they all share the same tendency such as high requirement of quality (compared to elderly travellers), and with strong recognition of branded hotels/travel products. On the other hand, the 1990s generation grew up entirely in this fast booming internet era, and are familiar with social media given the major role they play in their daily life. This also becomes one of the key elements in their travel behaviour. Now these young Chinese travellers have taken the lion's share of the travel market, becoming the main driver of this market. The age group between 22 and 30 accounts for 40% of the total travel group. Among outbound travellers, those below 20 take up 2 pp higher share compared to a year ago. Young travellers' travel behaviour is reshaping this sector. We list the three key features: (1) more spontaneous—travel decision-making is faster, and rather spontaneous; (2) more unique—try new destination and prefer not to travel on major holidays; and (3) more social—emerging interests in airbnb, 'trip sharing'.
Figure 115: Among total travellers in 9M16—22-30 Figure 116: Among the outbound travellers: traveller age accounts for the majority is getting younger
70% 66% 62% 60% 17% 14% 50%
40% 16% 30% 25%25%
40% 20% 13% 8% 10% 6% 3% 3% 1% 1% 0% <20 21-30 31-40 41-50 >51
0-21 22-30 31-35 36-45 >46 2013 2014
Source: Qunar, Credit Suisse research Source: Hotels.com, Credit Suisse research Feature 1: More spontaneous For young Chinese travellers, the decision process is generally faster than the elder travellers. According to Ctrip's data, 59% of the travellers born in the 1990s book their trip three days in advance, and only 48% of those born in the 1980s do the same. Being spontaneous also means less of an interest in traditional group travel with pre-designed routes and agenda. According to Hotels.com's survey, 81% of young travellers (age <35)
Young China 73 28 October 2015 prefer to travel independently. Only 20% would book through a travel agency but 57% choose to book a hotel through websites.
Figure 117: Young travellers book their trip just before Figure 118: Young travellers prefer independent travel they go over pre-designed routes/agendas offered by traditional agencies
50% 60% 45% book the trip 3 days in advance Prefer independent travel 81% 40% born in 1980s = 48% born in 1990s = 59% 35% 40% Booking through travel agency 30% 20% 25% 42% Booking through hotel website 20% 57% 15% 51% 10% Spend on shopping 54% 5%
0% Share travel pictures/experience 81%
through social media 93%
0-1 day 0-1
2-3 days 2-3 4-5 days 4-5 days 6-7 >61 days >61
8-10 days 8-10 0% 20% 40% 60% 80% 100%
31-60 days 31-60 11-15 days 11-15 days 16-30
90s 80s Age >35 Age <35
Source: Ctrip, Credit Suisse research Source: Hotels.com Feature 2: More unique Be different is the spirit of this young generation. Young travellers see travel as one of the ways to express themselves. The top 5 common destinations that the young travellers have been to are: HK, Korea (Seoul), Singapore, Thailand (Bangkok), Taiwan (Taipei). Among the 1990s-born users, 8% have been to all the five places, 31% have been to at least 3 out of 5, and only 1.5% have not been to any of the 5. Since they have already been to such common places, they will likely start to look for new destinations. The new rising trend of destinations is spread all around the world, with a specific strong trend for island destinations such as Sri Lanka, Saipan, Maldives, or exotic destinations like African or Middle-East countries. Feature 3: More social Social is one of the key elements in the younger generation's travel behaviour. Young travellers are social before the trip (using major UGC platforms to exchange information), and also on the road (timely sharing/posting on major social platforms). According to National Chinese Geography and Qyer's 2014 survey, 24% of the tourists share/exchange travel information when on the road, vs 15% in 2013. Another interesting feature we observed is that the 1990s generation is open to the concept of 'trip sharing'. They might look for travel partners through social platform/Apps, or even 'group up' directly at the destination.
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Implications for tourism sector To cater to young travellers' tastes and interests, travel service companies also have to be Changes need to be made more spontaneous (flexible), unique (diversified), and social. We observed some emerging to cater to young travellers' changes in the tourism sector, aroused by the young travellers' demand. distinctive features, namely more spontaneous (flexible), Travel agency: UGC business model unique (diversified), and 'Sharing' is gradually replacing simple 'appreciation' as the key motivation for young social travellers. Sharing photos and reviews is itself becoming a new trend. Diligent travellers do their homework before going on the road. In return, they are also keen to share, or to show off, during or after their travel. According to National Chinese Geography and Qyer's 2014 survey, 24% of the tourists share/exchange travel information when on the road, vs 15% in 2013. This is a trend following rising independent travel—need for an information exchange. It is also part of the growing pattern of consumer behaviour in China. The rise of social media also reshaped Mr. Chen's travel decisions. Chinese consumers' strong reliance on online travel platforms has also expanded to the review/sharing website/forum. Messaging and sharing on the internet/app is an essential part of young travellers' daily life. According to iResearch, UGC (User Generated Content) in China had a user base of 240 mn in 2014, accounting for 36% of internet users, or 18% of the total population. In 2014, Ctrip's review platform had the largest market share with 80 mn users, followed by Mafengwo (55 mn), and Qyer (50 mn). WeChat is also the most important social media app where Mr. Chen can post pictures/review to share with his friends/family. Other UGC platforms for travel information include 8264, 117go, BreadTrip, and Chan You Ji. The UGC model is also now starting to offer travel products that directly monetise from the social network base. Among the major players, Qyer has been the most active in launching its own T-shirt and related products, to strengthen brand awareness.
Figure 119: UGC websites/app have seen a strong rise Figure 120: The four major UGC platforms for travel UGC Logo Feature Establish 400 30% 26.4% platform since 350 Ctrip - Ctrip has the largest 2013 25% 'Gong Lue', market share in OTA, 300 the review supporting own UGC 17.7% 20% platform platform 250 Mafengwo Target user: young, 2006 fashion, hipster 200 15% Coverage includes domestic and outbound 150 Active user reached 60 7.8% 10% mn 100 Qyer Famous for outbound 2004 2.8% 5% travel content 50 106 242 361 38 WeChat - Most widely used 2011 - 0% message app in China. 2012 2013 2014E 2015E moment User penetration is >95% # of user as a % of total population with estimated 440 mn active users.
Source: iResearch, CEIC, Credit Suisse research Source: Company website, Credit Suisse research Lodging: Non-standard lodging offerings Young travellers require a unique travel experience at value for money. We see rising demand for non-standard lodging services, such as youth hostels, home stay, B&B. In this space, the penetration rate is still very low. In the US, 37% of travellers choose vacation rental over hotels. In China only 4% do so. According to Eguan, the market research institution in China, the market size for vacation rentals in China reached Rmb2.8 bn, or <1% of total hotel transactions. The major players in this segment are: Airbnb, Xiaozhu, Mayi, Tujia, Zhubaijia, Quhuhu (affiliate of Qunar).
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There are usually three types of business models: (1) marketplace platform or C2C; (2) B2C platform; (3) combination of the first two types. Most platforms in China adopt the third type: (combo of C2C and B2C), in order to rapidly build up stable and extensive supply. OTA platforms such as Ctrip, Qunar, and eLong, are also major market places for vacation rental as well. In the meantime, major hotel chains are also trying to diversify the brand portfolio. Plateno Group, the newly acquired hotel group by Shanghai Jinjiang, has been launching many new brands that embeds 'young elements'.
Figure 121: Major vocation branding platforms in China Vacation rental Airbnb (global) Airbnb (China) Xiaozhu Tujia Zhubaijia Quhuhu Mayi Logo
Established since 2008 2011-12 2012 2011 2012 2014 2011 Business model C2C C2C Combo B2C C2C Combo Combo Cities covered 34k >200 255 in China; >60 >60 >350 134 overseas Number of rooms listed >1.2mn <10k >50k >300k >5k >10k >300k Offering property Yes Yes Yes n.a. n.a. Yes Yes insurance Transaction fee 10% 10% 10% 12% 0%; charge on 0-15% 10% ancillary services Credit system Own Own Zhima Own Own Own Own (Alibaba) Source: Company data
Figure 122: Leading hotel chains have been diversifying brand portfolio in the last couple of years Plateno Shanghai Jinjiang Home Inns China Lodging Market share 20% 8% 22% 11% Number of hotel 2,291 937 2,568 1,819 Brand portfolio (in China) 7Days Jinjiang Inn Home Inn Ji Hotel Maison Albar Goldmet Express Motel 168 Starway Hotel Lavande Hotels Bestay Hotel Express Fairyland Joya Hotel Xana Hotelle Jinjiang Metropolo Yitel Manxin Hotel Pin Hotel Magnolia Homeinn Plus Hanting James Joyse Coffetel Hi Inn Hampton by Hilton elan City Home …that cater to young ZMAX Hotels travellers Wowqu IU Hotel Source: Company data Stock implications We pick Ctrip
■ Best integration of all moving parts: Ctrip owns the largest user base in the on-line Ctrip is our top pick in the travel agency segment, which gives it a leverage to expand into ancillary businesses travel sector such as their own UGC platform, and the vacation rental market.
■ Top strategic partner for all major foreign platform: As the largest OTA in China, Ctrip is the top choice as the China partner for all the major foreign players, such as
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Expedia, Royal Caribbean, Booking.com, and the like. This will also strengthen Ctrip's overseas tourism resources.
■ Outbound is the next earnings driver: The outbound hotel reservation volume (including Taiwan and Macau) achieved triple-digit YoY growth, accounting for 10% of total hotel volume. The international air ticketing business is also growing rapidly, accounting for 15% of total air ticket volume. For the packaged tour business, international travel accounted for 50% of the total travel volume and 65% of the total revenue. Its baby tiger programme makes outbound travel easier.
Young China 77 28 October 2015 China Auto: Evolving with young Chinese Bin Wang +852 2101 6702 ([email protected]) Mark Mao +852 2101 6710 ([email protected]) Shorter product cycle to cater to fast-evolving demand A typical vehicle's product life cycle is around 4-7 years, with a facelift generally introduced We expect electric vehicle after the first 2-4 years. Given the intensified competition and younger generation products' refreshment cycle customers' fast evolving demand, car makers must embrace these new changes in to be largely shorter to cater product design by shortening the product life cycle and keeping models fresh. to fast-evolving demand Korean OEMs Hyundai Motor and Kia Motor have experienced a worldwide share gain since 2008 from 7% to around 10% currently. Apart from improving quality and design, Korean brands' strengthening in competitiveness could also contribute to their accelerating new product cycles: from six years previously to four years now with faster restyling of product line-up and quicker response to market demand change, in our view. In the foreseeable future, with electric vehicles (EV) set to grow and prevail, we expect EV products' refreshment cycle to be largely shorter compared to current conventional cars, thanks to EV product's modularisation design. Modular design could largely shorten the product life cycle The supply chain of a conventional OEM is a very lengthy and complex operation—a We expect the future typical global OEM would require more than 1,000 suppliers to supply over 20,000-30,000 automotive industry would components, including engine, fuel system, transmission, drive train, exhaust, and the like, operate more like today's that make up an internal combustion engine (ICE) vehicle. consumer electronics industry, with rapid new Compared with the complexity needed to develop and produce an ICE vehicle, which product launches and requires sophisticated assembling skills to deal with massive precision spare parts, electric upgrade software version vehicles that have far fewer parts are much easier to manufacture and assemble. In releases particular, engine and transmission, the two most complicated systems in an ICE vehicle no longer exist in an EV. Propelled by an electric motor and a battery pack, an EV's propulsion system is less complex, as there are fewer moving parts. Transmission also becomes unnecessary, as the electric motor's output characteristic does not require a transmission to adapt. The electrification of the powertrain system eliminates a number of control and connection parts specific to ICE such as starters, spark plugs, clutch valves, tailpipe, fuel injection, distributor, fuel tank, among others, leaving an electric motor to match the battery pack—the single biggest cost component in a typical electric vehicle. EV's simplified powertrain system and spare parts reduce its supply-chain complexity, enabling modular design applicable for its mass production. By adopting modular design, each auto component becomes a self-contained functional unit with standardised interface that could fit into a number of different EV models. The new product launches would be more efficient and costs are expected to be reduced significantly. The future automotive industry would operate more like today's consumer electronics industry, with rapid new product launches and upgrade software version releases. Autonomous and connectivity make driving more fun The younger generation, who have grown up with iPhones and iPads, would find the future Car makers are striving to cars just as attractive. Car makers and IT companies are now striving to bring younger bring younger generation generation customers' every day digital life into the car. customers' every day digital life into the car
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Plugging internet into vehicles We see IT giants are eager to move into the nascent market for internet intelligent vehicles and many have already established tie-ups with major auto makers, such as Tencent, Alibaba, Baidu, and Letv, among others. For example, Alibaba signed a partnership agreement with SAIC to co-develop connected cars in July 2014, which will enable SAIC to use Alibaba's AliYun operating system, its mapping and music services, and big data and cloud computing technologies. Baidu, a Chinese internet search giant, also launched its in-car infotainment platform, "CarLife", which enables car users to link their smartphones with in-vehicle infotainment screens, in order to access all of the connected car services based on Baidu Maps. Meanwhile, Baidu also hopes to introduce an autonomous car in collaboration with its artificial intelligence-focused Deep Learning Institute and BMW. Other examples include Letv's partnership with BAIC Motor, Pateo & Yongche with Chery, Sina with Weichai Enranger, etc. Tencent's tie-up with Harmony is to develop high-end connected EVs. By incorporating Tencent's internet platform, car drivers can access services such as messaging, mapping, music, and payment via telematics platform. Tencent "WeDrive" is a vehicle internet total solution which integrates Tencent QQ, QQ music, Tencent news, Dianping, Optional share, Tencent watch the game, NavInfo Fun Drive navigation, and Fun Drive T service. "WeDrive" enables users to enjoy the experience of a multi-terminal synchronisation vehicle internet product during driving and provides safety, entertainment, social and life services for the driving life. "WeDrive" can also help car owners check vehicle conditions such as mileage, fuel consumption and tyre pressure, tele-control the vehicle's door switch, lighting switch and air conditioning switch, and send to the vehicle remote POI position info and car automatic navigation. Autonomous to free your hands Autonomous vehicles are definitely the most shaping trends in the auto industry. Autonomous driving technology enables drivers to take their hands off the steering wheel, feet off the pedals and turn over the controls to the car itself. Drivers will be free to use their commuting time to enjoy the connectivity of the car. You will find infotainment systems are all around you from dashboard to touch panels and rear-seat entertainment systems. Your car also links with other aspects of your digital life. Autonomous could provide further benefits beyond entertainment At least in two ways autonomous driving and connectivity technology will redefine the automotive industry, in our view. Accident rates cut: Human error or driver misconduct are major causes of traffic accidents. In this sense, autonomous cars would become a major innovation to reduce car accidents. Compared to easily distracted human drivers, autonomous driving cars equipped with multiple sensors, all-around cameras, and powerful computing processors, will be on constant alert and smart enough to avoid any potential collision. Moreover, electronic control system's swift response time (20ms vs. 200ms for mechanical control system) could also mean the difference between life-or-death for drivers and passengers. Reshape traffic pattern: The connectivity would be all around. Cars on the road can also communicate with other vehicles and with intelligent roadway infrastructures, integrating themselves into the big transportation ecosystem. Cars are able to coordinate and optimise their own routes to make traffic flow in a more efficient way—increasing road networks capacity, reducing traffic jams and improving fuel economy. In addition, autonomous and connected cars would also become key drivers of the car-sharing development. Imagine that, cars can dispatch themselves on demand to transfer people.
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On the way to autonomous driving Although it seems unlikely to see fully autonomous connected cars on the road in the near term, the technology is no longer science fiction. We have already witnessed the transformation in its early stages: between level 2 to level 3 according to US National Highway Traffic Safety Administration (NHTSA)'s definition, with wireless internet connection, infotainment systems and assistant functions for automated driving and parking.
Figure 123: A road map to fully autonomous cars Level Description No automation Level 0 The driver is in complete and sole control of the primary vehicle controls—brake, steering, throttle, and motive power—at all times. Function-specific Level 1 Automation at this level involves one or more specific control functions. Examples include electronic stability automation control or pre-charged brakes, where the vehicle automatically assists with braking to enable the driver to regain control of the vehicle or stop faster than possible by acting alone. Combined function Level 2 This level involves automation of at least two primary control functions designed to work in unison to relieve the automation driver of control of those functions. An example of combined functions enabling a Level 2 system is adaptive cruise control in combination with lane centering. Limited self-driving Level 3 Vehicles at this level of automation enable the driver to cede full control of all safety-critical functions under automation certain traffic or environmental conditions and in those conditions to rely heavily on the vehicle to monitor for changes in those conditions requiring transition back to driver control. The driver is expected to be available for occasional control, but with sufficiently comfortable transition time. The Google car is an example of limited self- driving automation. Full self-driving Level 4 The vehicle is designed to perform all safety-critical driving functions and monitor roadway conditions for an automation entire trip. Such a design anticipates that the driver will provide the destination or navigation input, but is not expected to be available for control at any time during the trip. This includes both occupied and unoccupied vehicles. Source: NHTSA Driver support: The development of driver support systems, collectively known as Advanced Driver Assistance Systems (ADAS) to improve drivers' safety and comfort is encouraging. ADAS applications already in use including:
Figure 124: Major ADAS applications Applications Descriptions Active Cruise Control (ACC) Automatically adjusts the vehicle speed to maintain a safe distance between vehicles while driving in cruise control. Electronic Stability Control (ESC) Automatically improves a vehicle's stability by detecting and reducing loss of traction. Advanced Parking Assist (APA) Assists driver in parking by automatically detecting obstacles and carrying out the optimum steering movements. Automatic Emergency Braking (AEB) Automatically applies brakes to avoid collision by sensing distance to approaching obstacle. Blind Spot Monitoring (BSM) Issue warnings by detecting other vehicles located to the driver’s side and rear. Forward Collision Warning (FCW) Issue warnings by detecting distance of vehicles or obstacle ahead if closer than intended. Rear Cross Traffic Alert (RCTA) Issue warnings by detecting approaching rear vehicles, and cooperate with passive safety system. Lane departure warning (LDW) Issue warnings if the vehicle is leaving its lane (unless a turn signal is on in that direction). Source: Credit Suisse research Via various sensing devices (e.g. cameras, radar and etc.) to detect and on-board computer system to process, ADAS applications make cars more aware of their surrounding environment to help drivers to park or manoeuvre their vehicles through traffic. The advances in ADAS features will eventually lead to completely autonomous vehicle. Increasing demand for car customisation The rising trend of car customisation is reshaping China's auto ecosystem. Currently, car Due to self-expression customisation is more often seen in high-end models, with high cost and complex pursuit of younger procedures. In the near future, we believe car customisation will become more popular for customers as well as mass brands in China, thanks to the self-expression pursuit of younger customers as well innovative sales channel, as innovative sales channel enabled by the internet. there is a rising trend for car customisation
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On the demand side Younger generation customers pursue personalisation, and would thus value car customisation options. Different from the elder generation which prefers not to stand out, the post-80s/90s seek to differentiate themselves from others. As a result, tailor-making their private cars to represent their characteristics would be something they would welcome. According to J.D.Power's report "Car purchase trend of Chinese young generation", post- 90s Chinese as a percentage of car buyers has increased to 9% in 2015 from 5% in 2014. These post-90s emphasise more on car design than their western peers, and 61% of those surveyed indicated they preferred a tailor-made car. Therefore, we expect demand for car customisation to increase in the foreseeable future for China's auto market.
Figure 125: Post-90s as % of car buyers in 2014-15 Figure 126: Comparison—consideration on car purchase 10% 60% 56% 9% 50% 9% 49% 48% 50% 45% 8% 39% 7% 40% 6% 5% 30% 5% 4% 20% 3% 10% 2% 1% 0% Car design Quality Safety 0% 2014 2015 Chinese post-90s Western post-90s
Source: J.D.Power Source: J.D.Power On the supply side Internet enables online-to-offline (O2O) service procedures, making the supply chain more process-efficient and cost-effective. Previously, customers needed to physically visit 4S stores and check customisation options before placing an order. If personalised features are requested, waiting time will be much longer due to prolonged communication between dealer and OEM as well as complexity on customised production. Nowadays, O2O car customisation services is emerging and some mass brand OEMs are already offering such kinds of service, e.g. Changan Auto, Beijing Hyundai, Great Wall Haval, although the service is limited in nature, so far. For example, Changan launched "Benben PPO" mini- size sedan on Tmall online store in June 2015, allowing customers to personalise the car's exterior design (seven choices: four new ones and three existing ones) and interior specifications (seven choices), up to 49 choices but with incremental Rmb2,000 cost only. The deposit can be paid online and a 4S store salesperson will contact the customer for follow-up, including signing the contract, paying the remaining amount, and picking up the finished car.
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Figure 127: "Benben PPO" sedan offers 7 exterior choices Figure 128: O2O car purchase procedures
Source: Company data, Tmall Source: Company data, Tmall
Figure 129: Great Wall Haval O2O customisation service Figure 130: Beijing Hyundai O2O customisation service
Source: Company website Source: Company website In the future, we believe the online sales channel will be more efficient. People can customise their cars on the website/App, place the order and make the payment online directly. The OEM will receive the order and start production planning immediately. Customers will be able to check production progress online and get notified when the car is ready for pick-up at the nearest 4S store. Also, more customisation variations (or even free style) will be available, thanks to modularised auto parts and advanced technology (e.g. 3D printing). For example, you can select exterior design (choose your favourite colour, or even paint pattern on the exterior), interior design (choose your theme, whether Hello Kitty or Renaissance; choose size & number of car seats), infotainment system (choose your preferred operating system (whether Android or iOS or others) / audio system (whether high-end or basic) / system interface), etc. To highlight, the service will not be limited to high-end brands, but to all mass brands as well. Implications for China's auto industry New entrants could disrupt the traditional auto industry In the past, the proprietary technology owned by leading OEMs on engines has set high Players with pricing power entry barriers for smaller players to compete. However, when the internal combustion and cost control ability engine vehicles are replaced by new energy, autonomous, connected and customised would win and Chinese vehicles, technology focus will be shifted from engine to other key components, e.g. OEMs have competitive battery and auto electronics. New entrants who have strong R&D capacity on these new advantages technologies will become the leader in this industry-wide transformation.
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Those with pricing power and cost control ability would win
■ Higher selling price: Currently, the homogenisation of auto models from different OEMs is putting pressure on the selling price at the retail end. However, OEMs can gain pricing power if their products: (1) are kept fresh by shorter product cycle; (2) offer high-technology features, e.g. ADAS and connectivity; and (3) can be tailor- made.
■ Higher manufacturing cost: Additional cost occurs due to: (1) high battery cost (at current technology level), which is necessary in NEV; (2) high R&D expenditure on autonomous and connected cars; and (3) high customisation cost as this technology currently lacks economies of scale.
■ Change is key: Car manufacturers that can adapt quickly to the young generation's evolving demands and accelerate technology improvement for cost control will win out over competitors. On the one hand, OEMs need to cater to customer demand in order to have higher pricing power. On the other hand, OEMs also need to develop new technologies in order to reduce manufacturing cost. High price and higher cost does not necessarily mean lower margin. But only those who are responsive to changes will survive. Chinese OEMs have competitive advantages Looking into the future, we believe Chinese OEMs are in a good position to welcome the auto industry transformation, because:
■ Quicker response to demand changes, compared to global giants. Chinese local OEMs usually adjust their production planning faster than foreign peers when market conditions change.
■ More keen on auto electronics, as can be seen in the popularity of car cameras in the Chinese market vs. in overseas markets.
■ Better understand customer demand, compared to foreign carmakers. Chinese local OEMs are in closer touch with customers, thus have a better understanding of their needs. As an example, Great Wall Haval offers customisation options for its H1, H2 and H6 Coupe SUVs. Buyers can choose exterior colour, transmission type and interior specifications online. We regard this as Great Wall's water testing for its tailor-making strategy. We expect more models will be available for customisation in the coming years, and the customisation rate to reach 7.4% by 2017E.
Figure 131: Haval customised units forecast 2014-17E Figure 132: Haval customisation rate forecast 2014-17E 70,000 100% 61,100 90% 60,000 80% 50,000 70% 41,720 40,000 60% 50% 30,000 40% 18,550 20,000 30% 20% 10,000 3,120 10% 5.5% 7.4% 0.6% 2.7% 0 0% 2014E 2015E 2016E 2017E 2014E 2015E 2016E 2017E
Customized units Customization rate
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
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Geely and Harmony should benefit from the structural change Geely: well positioned to capture the fast evolving demand on upgrading Geely and Harmony should technology & product benefit from the structural Geely, whose products are mainly sold to young first-time customers, knows how to meet change the taste of the younger generation customers. Moreover, we are positive on the Volvo-related long-term benefits to Geely. With the Geely-Volvo story playing out, we believe Geely is well positioned to capture the fast evolving demand of younger generation customers on upgrading technology and product through Volvo support. Co-developed modularised platform paves the way to shorter product cycle Geely and Volvo have co-established a research centre in Gothenburg (China-Euro Vehicle Technology, CEVT). The key projects for CEVT is to develop the new generation modularised car architecture—Compact Modular Architecture (CMA), including C-segment Modular Architecture and B-segment Modular Architecture. Meanwhile, Geely will also develop another modularised car architecture—Framework Extendable (FE) platform for its new Emgrand SUV. The first Geely brand CMA-technology vehicle is planned to be launched in end-2016 in China—a mid-sized SUV (code CX11). The company guided that Geely brand will launch at least two CMA-technology vehicles each year in the future. The CMA and FE platform allow cars to be designed for different lengths, widths and heights, from small-size sedan to large-size SUVs. Via integrating different 'platforms' into single 'architecture', the architecture technology could enjoy a lower cost. Meanwhile, it can shorten the new product R&D cycle, via easy change and adapt to new customer preferences and trends. Leveraging Volvo's global supply chain and technology Geely, as one of the few Chinese local brands, has gained access to the global auto parts supply chain via Geely-Volvo joint R&D and procurement. Its global supply chain exposure enables it to source high quality cutting-edge components to ride on the trend of vehicle electrification and automation. Moreover, Volvo is also a front runner in autonomous driving technology. By integrating Volvo's technology, Geely would be well prepared to catch the emerging opportunities. According to Volvo's autonomous driving programme, Drive Me, Volvo plans to launch a pilot project by delivering 100 unit autonomous cars in the hands of customers on select roads around Gothenburg by 2017. Harmony: Transforming into a new energy vehicle (NEV) maker Harmony New Energy Auto, a leading luxury dealer group in China, is transforming into a new energy vehicle (NEV) maker. It has tied up with Tencent and a leading tech company and has acquired an 88% stake in Greenfield Motor (a NEV maker). Aiming to offer high-quality internet-enabled intelligent EV series: Harmony guided that this ambitious alliance plans to build a new high-end electric vehicle plant in Zhengzhou city, with 200,000 units of annual capacity. This plant will be used to launch high-end products (priced at around Rmb300,000), such as a pure-electric internet- enabled intelligent vehicle by end-2017, which could drive 300 km on a single charge with 180 km/hour of maximum speed. The alliance will invest Rmb4 bn in the next three years for the new plant and the development of new high-end EV models (a sedan and an SUV), per Harmony's guidance.
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Positive on this coalition to penetrate into China's fast growing EV market: We understand there are quite a few EV new entrants, but this alliance is most likely to work out. With the high-end electric internet intelligent vehicle launch in end-2017, we estimate 20,000/30,000/45,000 unit sales in 2018/2019/2020E, respectively. We think this volume assumption is achievable because: (1) EVs are much simpler mechanically than ICE vehicles, with far fewer parts, making it much easier for new entrants to get into the electric vehicle game, (2) one of its partner's has a well-developed EV component supply chain along with the strong battery expertise of Boston power, its battery supplier; and (3) Tencent's expertise in on-line Infotainment and Telematics and Harmony auto's strong EV after-sales network. We believe the ambitious alliance will be able to offer high-quality high-end EVs series and estimate this operation to book Rmb408/974 mn in net profit in 2019/20E after booking a Rmb288 mn loss in 2018.
Young China 85 28 October 2015 Online wealth management Anson Huang +852 2101 6823 ([email protected]) Steven Zhu +852 2101 6535 ([email protected]) Chinese middle class going younger, wealth management going online The young generation is quite different from its parents or grandparents inasmuch as (1) Wealth management has they have much better wealth management consciousness, and they can even make been going online, and money by lending through P2P (“person to person”); (2) they have more knowledge in embracing enormous computers and can use smartphones quite expertly; (3) they are not so conservative in growth, but still accounts for wealth management and they do not mind investing most of their assets in high-risk only 3%+ of total AUM financial products, such as equity, trust product, P2P, and the like; and (4) they have customised needs for wealth management, and many of them want to invest any amount any time and any where. As a result of the above, wealth management has been going online, and embracing enormous growth, but still accounts for only 3%+ of total AUM. Fragmented competitive landscape, with three kinds of players in China’s online wealth management market The online market can be divided in terms of channel: (1) BAT (Baidu-Alibaba-Tencent): Rmb748 bn of AUM and 56% of market share. (2) Traditional financial institutions (FIs), Rmb207 bn of AUM and 16% market share. (3) Third-party platform: Rmb387 bn of AUM and 29% market share, including 22% for P2P and 7% for other wealth management distributors. Who will be the winner? Entrance of client flow and access to underlying assets hold the key Young China chooses online wealth management platforms based on: (1) convenience; (2) Eastmoney.com, NOAH, high risk-adjusted yields. BAT has apparent advantages in convenience due to the Ping An, Industrial Bank are enormous number of active users, and has been gradually penetrating into B2C lending prominent players in the based on big data. Traditional FIs have more expertise in risk management and rich market resources of high-yield assets due to unparalleled off-line presence. Independent third- party organisations are evolving in two directions: first is transforming its high user stickiness into traffic for online wealth management product purchases; second is developing risk management capability by exploring data-based lending techniques. Prominent players in the market include Eastmoney.com, NOAH, Ping An, Industrial Bank. Wealth management in China Wealth management in China: emerging rapidly with the mass having more management consciousness With higher disposable income and more wealth management knowledge, Chinese people China wealth management have been shifting their money from deposits, mainly demand part, to various financial sector has seen AUM to markets to fight inflation and keep up with rising residential prices. According to our grow three folds, during estimates, total assets under management (AUM) for the purpose of wealth management 2010-14 has reached Rmb38.4 tn by end-2014, including 39.2% or Rmb15 tn of bank wealth management products (WMPs), 24.3% or Rmb9.3 tn of insurance investment products, 17.4% or Rmb6.7 tn of assets under management by mutual fund companies, 11.2% or Rmb4.3 tn of trust products, 4.4% or Rmb1.7 tn of assets under management of PE/VC companies, 2.2% or Rmb0.9 tn of assets under management of private fund, 1.3% or Rmb0.5 tn of asset management products by securities companies. During 2010-14, China's wealth management sector has seen AUM to grow three-fold, implying a CAGR of 38% YoY.
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Figure 133: China wealth management sector AUM by Figure 134: China wealth management sector AUM managers breakdown by managers, FY14 Private fund Banks Trust 2.2% Securities companies PE/VC Insurance Securities companies 1.3% 4.4% (RMB tn) Mutual fund companies Private fund Trust 40 38.4 PE/VC 11.2% 35 Banks 30 26.4 39.2% 25 20.5 20 Mutual fund 15.1 15 companies 10.6 17.4% 10 5 0 2010 2011 2012 2013 2014 Insurance 24.3% Source: CBRC; CTA; CIRC; CSRC; AMAC, Credit Suisse research Source: CBRC; CTA; CIRC; CSRC; AMAC, Credit Suisse estimates For most Chinese families, banks are the most popular and traditional way to invest their money. However, after two rounds of an equity market bull rally in 2006-07 and 2H14- 1H15, we believe a significant share of ordinary people now know the time value of money and they do not want to let their money sleep in banks accounts any more.
Chinese banks may have been losing their deposits, especially demand deposits. We can Chinese banks are losing see some interesting points from PBOC’s deposit data that (1) China’s total deposits seem their demand deposits to be on an uptrend since 2004, but the growth rate has gradually declined to 4.7% YoY in 2Q15 from the peak of 29% YoY in 2Q09. (2) The demand part balance saw an even poorer trend than whole deposits, and the growth rate has trended down to low single digit in the past several quarters or even negative (-0.2% in 1Q15), on the back of fast interest rate liberalisation and finance disintermediation. (3) Accordingly, the proportion of demand deposits in total deposits has decreased from a near-term peak of 42.9% in 4Q10 to only 27.9% in 2Q15. And we cannot see any sign that this demand deposit loss trend has stopped for Chinese banks.
Figure 135: China’s total deposits and growth Figure 136: China’s demand deposits
Total deposit (LHS) Growth-total (RHS) Demand deposit (LHS) Demand deposit/total (RHS) (RMB tn) Growth-demand (RHS) (%) (RMB bn) (%) 120 50 35,000 45
40 100 30,000 40 30 80 25,000 35 20 60 20,000 10 30 15,000 40 0 25 10,000 20 (10) 5,000 20 0 (20)
0 15
4Q09 4Q12 2Q15 4Q04 2Q05 4Q05 2Q06 4Q06 2Q07 4Q07 2Q08 4Q08 2Q09 2Q10 4Q10 2Q11 4Q11 2Q12 2Q13 4Q13 2Q14 4Q14
4Q13 3Q05 2Q06 1Q07 4Q07 3Q08 2Q09 1Q10 4Q10 3Q11 2Q12 1Q13 3Q14 2Q15 4Q04 Note: 2015 data has been adjusted, because from 2015 PBOC’s total Note: 2015 data has been adjusted, because from 2015 PBOC’s total deposits data started to cover deposits of non-banking financial deposits data started to cover deposits of non-banking financial institutions; Source: PBOC, Credit Suisse research institutions; Source: PBOC, Credit Suisse research
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Chinese middle class going younger, and wealth management going online We can see obviously in China the middle class is getting younger, given (1) a high- Wealth management has growing Chinese economy grew the wealth of some young guys; (2) by this year, the been going online 1985s has turned thirty years old and some have decent jobs/income and have become the new generation of middle class. This generation is quite different from their parents or grandparents inasmuch as (1) they have much better wealth management consciousness, and they can even make money by lending through P2P (person to person); (2) they have more knowledge of computers and can use smartphones quite expertly; (3) they are not as conservative in wealth management and do not mind investing most of their assets in high-risk financial products, such as equity, trust product, P2P, and the like; and (4) they have customised needs for wealth management, and many of them want to invest any amount any time and any where. As a result of the above, wealth management has been going online.
However, China’s wealth management industry is still quite new and many specific sub- sectors and investment categories are not mature. And to some extent China’s wealth management industry was restricted by current regulations.
The interaction point of the demand-supply will be the standardised financial product with high liquidity and higher-than-deposit investment returns, which also matches with the reality of why money market funds (MMFs) became popular in China.
The launch of “Yu E Bao” in June 2013, in cooperation with by Alibaba’s Alipay and Tianhong Asset Management, marked the start of China’s online wealth management. Yu E Bao also beat everyone's expectation by the fast expansion of its AUM, from Rmb56 bn in 3Q13 to Rmb712 bn by 1Q15. Even though Yu E Bao's AUM shrank by 13% or Rmb98 bn to Rmb613 bn in 2Q15; it is still the largest MMF in China, with 25%/25% of market share in the entire MMF market and online wealth management sector respectively.
Figure 137: China MMFAUM vs total deposit Figure 138: AUM of Yu E Bao
MMF AUM (LHS) MMF AUM /total deposit (RHS) (RMB b) AUM of Yu E Bao (RMB b) (%) 800 2,500 2.5 712 700 613 574 579 2,000 2.0 600 541 535 500 1,500 1.5 400 1,000 1.0 300 185 500 0.5 200
100 56 0 0.0 4
-
2006 2008 2003 2004 2005 2007 2009 2010 2011 2012 2013 2014
2Q15 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15
Source: CBRC; CTA; CIRC; CSRC; AMAC; Wangdaizhijia, Credit Source: Rong360; Wangdaizhijia, Credit Suisse research Suisse research
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Landscape of China’s online wealth management Based on our statistics, we estimate the AUM of online wealth management has reached The online market can be Rmb1.3 tn in China in end-3Q15, occupying 3%+ of the pie of emerging wealth divided in terms of channel: management industry. The online market can be divided in terms of channel: (1) BAT (1) BAT; (2) traditional (Baidu-Alibaba-Tencent): Rmb748 bn of AUM and 56% of market share. (2) Traditional financial institutions; (3) financial institutions (FIs), Rmb207 bn of AUM and 15.4% market share. (3) Third-party third-party platform platform: Rmb387 bn AUM and 29% market share, including 22% for P2P and 7% for other wealth management distributors.
Figure 139: Market overview of online wealth management in China
RMB748b，55.7% share
BAT
RMB207b，15.4% share
Traditional Financial Institutions
RMB387b，28.8% share
Third-party
Agents
Source: Company data, Credit Suisse estimates
Figure 140: China wealth management sector AUM by Figure 141: China online wealth management sector AUM channel (2014) breakdown by channel (2014)
Online 3.5% Third-party: P2P 22.0%
Third-party: WM 6.8% BAT 55.7%
Traditional financial Offline institutions 96.5% 15.4%
Source: CBRC; CTA; CIRC; CSRC; AMAC; Rong360; Wangdaizhijia, Source: Rong360; Wangdaizhijia, Credit Suisse research Credit Suisse research
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BAT: internet giants with mega data strength As well-deserved internet giants, BAT has unique advantages in terms of its long-term accumulation of customer resources and platform advantages, its big data and mobile terminals. They are also quite aware of what they have and they actively explore the internet financial market, and further obtain the first-mover advantage in the "Internet + financial " space. Baidu has a stable and huge PC and mobile-terminal user base, based on which it provided platforms for financial institutions to sell fund products, docking user needs with financial products. Alibaba takes advantage of its oligopoly position in the areas of electric commerce and electric payment, flexibly using its consumer credit data to exploit internet finance. Tencent’s advantage lies in the pay channels represented by Tenpay, payment agent Wechat, and mega data resources based on huge accumulated social user groups. All of the three companies have absolute superiority of customer coverage in the e- commerce, search, social networking and other niche segments, and also formed a complete industrial chain and ecosystem in other regions, including payment, financing, credit-collection, etc. Particularly Alibaba and Tencent have been actively involved in a private bank pilot, pioneering a new world of internet finance. BAT’s wealth management products include Yu E Bao from Alibaba, Huo Qi Tong from Tencent and Baidu Bai Zhuan from Baidu—all of which focus on sales of money market funds. As of 2014, BAT’s money market fund size had reached Rmb6,661 bn, of which Yu E Bao has been no doubt the largest one with AUM of Rmb579 bn and accounting for 86.9% of BAT’s scale.
Figure 142: AUM breakdown of BAT’s wealth management Figure 143: Customer base of Yu E Bao as of end-2014
No. of Yu E Bao users (LHS) Growth q-q (RHS) Weichat 6.2% (mn) (%) Baidu 250 140 Finance 226 6.9% 205 120 200 185 100 149 150 124 80
60 100 81 40 43 50 20 20 3 0 0 Yu E Bao 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 86.9%
Source: CBRC; CTA; CIRC; CSRC; AMAC; Wangdaizhijia, Credit Source: Rong360; Wangdaizhijia, Credit Suisse research Suisse research Traditional FIs: Tremendous presence with strong professionals To consolidate the customer base, enhance core competitiveness, traditional financial institutions have actively kept up with the development of internet finance. They have simplified the transaction process, lowered the investment threshold, and attracted some traffic from physical outlets to online through PC and mobile terminals. BAT’s “Bao” series products largely attracted original deposit capital, especially from demand deposits, which forced traditional banks to innovate their own MMF products to stop the flow of funds. According to Rong360, 54 new “Bao” products were born in China,
Young China 90 28 October 2015 of which 21 were initiated by banks, 19 by funds and 14 by others. The members of “Bao” family also increased from 25 at end-2013 to 79 at end-2014. In addition to the existing online networks, major banks have piloted in direct banking and mobile banking, to actively cope with the challenges from internet finance. Since 2005, Industrial Bank has deployed much effort to developing the bank-to-bank platform, which currently has become a comprehensive internet banking platform covering eight service modules of payment and settlement, wealth management, financial services, structural optimisation, technological output, fund management, forex agents and comprehensive training. In 2014, the bank-to-bank platform completes 26.6 mn settlements with cumulative settlements worth Rmb2.0 tn, implying a year-on-year growth of 118%/55% respectively. Base on its bank-to-bank platform, Industrial Bank launched the "Big Money Manager" (“钱 大掌柜”) in December 2013, which is an internet-based wealth management portal. By the end of 2014, the total number of contract customers of "Big Money Manager" exceeded 1 mn and wealth product sales exceeded Rmb200 bn. In addition, INDB introduced a new generation cash management tool “Manager Wallet” (“掌柜钱包”) in March 2014.
Figure 144: INDB’s bank-to-bank platform Figure 145: INDB’s wealth management business
Settlement amount (LHS) Growth y-y (RHS) AUM of Manager Wallet (LHS) (RMB b) (%) Customer base of Big Money Manager (RHS) 2,500 180 (RMB b) ('000)
160 80 12
2,000 140 70 10 120 60 1,500 8 100 50
80 40 6 1,000 60 30 4 500 40 20 2 20 10
0 0 0 0 2011 2012 2013 2014 1H15 1H14 2H14 1H15
Source: CBRC; CTA; CIRC; CSRC; AMAC; Wangdaizhijia, Credit Source: Rong360; Wangdaizhijia, Credit Suisse research Suisse research Independent third-party organisations: High client flow and user stickiness By end-2014, the wealth management scale of independent third parties was Rmb387 bn, accounting for 29% of market share. East Money Information Co., Ltd (300059 CH) and Noah Holdings Limited (NOAH US) are good examples. As the largest internet finance information platform, East Money provides investors with comprehensive information and personalised professional services through its fund shopping platform titled fundfund.com and its portal site. For different risk appetites of investors, fundfund.com introduced a series of products, covering MMF ”Huo Qi Bao”, short-term WMP “Ding Qi Bao”, the index fund products "Zhi Shu Bao" and other types of equity products. As of 2Q15, fundfund.com has included a total of 89 fund companies and 2,538 fund products; and fund subscription has reached 29 mn and the sales amount of MMF ”Huo Qi Bao” has touched Rmb238 bn.
Noah Wealth is China's leading third-party wealth management institution for high-end customers, offering fully diversified financial services of wealth management, asset management, investment banking, and internet finance. By end-2014, the registered number of high net-worth clients reached 70,557, of which 16,749 or 23.7% are active
Young China 91 28 October 2015 customers. And its assets under management amounted to Rmb180 bn, including Rmb49.7 bn under its asset management subsidiary Gopher Assets. In June 2014, a brand new wealth management platform “Yuan Gong Bao” debuted, which was introduced by Noah Wealth and was targeted to be “the private bank of white-collar workers” and helped Noah Wealth transform from a third-party wealth management institution into a comprehensive financial services group. By the end of last year, the AUM of “Yuan Gong Bao” reached Rmb3 bn and the average customer transaction amount exceeds 145 thousand yuan.
Figure 146: Fund sales of East Money Figure 147: Asset management scale of Noah Wealth
MMF sales (LHS) Non-MMF sales (LHS) AUM (LHS) Growth y-y (RHS) Growth of MMF (RHS) Growth of non-MMF (RHS) (RMB b) (%) (RMB b) (q-q, %) 200 140 180.2 180 300 180 120 160 160 250 140 140 100 200 117.0 120 120 80 100 150 100 72.3 60 80 100 80 60 60 48.0 40 50 40 40 25.4 20 - 11.0 20 20 2.2 5.0 0 (50) 0 0 2007 2008 2009 2010 2011 2012 2013 2014 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 Source: CBRC; CTA; CIRC; CSRC; AMAC; Wangdaizhijia, Credit Source: Rong360; Wangdaizhijia, Credit Suisse research Suisse research Who will be the winner of online wealth management? The young China generation chooses online wealth management platforms based on: (1) Different institutions adopt convenience; (2) high risk-adjusted yields. BAT has apparent advantages in convenience different strategies in due to the enormous number of active users, and has been gradually penetrating into B2C developing their online lending based on big data. Traditional FIs have more expertise in risk management and wealth management rich resources of high-yield assets due to an unparalleled off-line presence. Independent business third-party organisations have evolved in two directions: first is transforming their high user stickiness into traffic for online wealth management products purchase; and the second is developing risk management capability by exploring data-based lending techniques.
Figure 148: Comparison of different institutions in developing online wealth management business Strength Weakness BAT 1. Technology and Mega Data Advantage. 1. Risk control measures are inadequate 2. The large and stable customer coverage and strong user stickiness. 2. The product categories are limited and they have to reach 3. Good brand and reputation in the field of online wealth management. traditional financial institutions for product development. 4. A dominant position when in cooperation with traditional financial institutions.
Traditional financial 1. Traditional FIs have good credibility and customers have high confidence in 1. Online marketing capability is poor institutions them. 2. Their platform is relatively closed 2. Huge client base and a large number of high net worth clients. 3. A relatively passive role in cooperation with internet companies 3. Rich variety of financial products 4. More mature and sound in investment management and risk control experience 5. More professional and they can provide more customized services
Independent third- 1. They are usually combined with financial information and their users has high Wealth management product range and operating model of a single , party organizations stickiness. limited to sales agent of fund products 2. The covered user groups are highly specialized. 3. Able to provide professional supplementary services, such as financial advisory, products shopping guide, etc.
Source: Credit Suisse research
Young China 92 28 October 2015 The rise of automation Baiding Rong +852 2101 6703 ([email protected]) Data from NBS shows that China is rapidly entering the phase of an ageing society, with There is a rise in automation the old dependency rate reaching 13% in 2014 (from about 7% 50 years ago and 10% a as China is rapidly entering decade ago). the phase of an ageing society A change in occupational preferences is evident in the young generation. Rising education and demographic changes have also resulted in better awareness about occupational health and safety. Jobs exposed to high temperature, dangers and a poisonous environment will naturally be replaced by robots and automation systems. The government has also set stricter employee benefit requirements, further adding costs to labour- intensive companies. Factory jobs are less preferred compared to office jobs. The Ministry of Human Resources and Social Security's survey revealed that since 2004 equipment operators have been in short supply, while clerical jobs have seen better demand. This was evident in a severe labour shortage in the coastal regions about five years ago.
Figure 149: People prefer office positions to factory jobs (city labour supply / city labour demand, <1 means shortage)
2.5
2.0
1.5
1.0
0.5
-
1Q01 2Q02 4Q06 2Q11 2Q01 3Q01 4Q01 1Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14
Clerical Equipment operator
Source: Ministry of Human Resources and Social Security, Credit Suisse estimates
Figure 150: Rapid increase in hourly wages in China Figure 151: Ageing economy should lead to higher labour (2002-12 CAGR) costs in China
14% Brazil 12%
Korea 10%
Taiwan 8%
Germany 6%
4% Japan 2% USA 0%
China
1996 2002 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1999 2005 2008 2011
0% 5% 10% 15% 20% Old age dependency
Source: Bureau of Labour Statistics Source: NBS
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Urbanisation and improved living standards have also resulted in shorter life cycles of products and more diversified demand. This requires factories to produce in small batches with high flexibility and consistent quality. Apart from the traditional manufacturing industries, the adoption of automation is most prevalent in 3C industries (Consumer electronics, Computer and Communication), because of (1) products' small size, (2) demand for precision and (3) rapid technology upgrades. 35% robot ownership CAGR over 2014-20E based on Japan/Korea's experience China is already on a faster track We believe that the demographics issue is one of the most important factors for rising Demographics issue is one automation. We study Japan and Korea, the two most important eastern Asia countries, on of the most important factors the relationship between the old dependency ratio and robot ownership. We find that robot for rising automation ownership accelerated when the old dependency ratio reached 10-15 (early 1980s for Japan and 2010 for Korea). China reached an old dependency ratio of 13 as of 2014, suggesting that it is already on a faster track.
Figure 152: Japan robot ownership and dependency ratio Figure 153: Korea robot ownership and dependency ratio
45 450,000 18 180,000
40 400,000 16 160,000
35 350,000 14 140,000
30 300,000 12 120,000
25 250,000 10 100,000
20 200,000 8 80,000
15 150,000 6 60,000
10 100,000 4 40,000 2 20,000 5 50,000 - 0 - - 1990 1993 1996 1999 2002 2005 2008 2011 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 Korea robot ownership (RHS) Korea old age dependency Japan robot ownership (RHS) Japan old age dependency
Source: IFR, World Bank Source: IFR, World Bank
Figure 154: China has reached the take-off point of robot ownership based on old age dependency 14 200,000 180,000 12 160,000 10 140,000 120,000 8 100,000 6 80,000
4 60,000 40,000 2 20,000 - 0 1999 2001 2003 2005 2007 2009 2011 2013
China robot ownership (RHS) China old age dependency
Source: IFR, World Bank
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Figure 155: China has already reached the take-off point of robot ownership based on old age dependency 80 450,000 Japan old Japan robot 400,000 70 ownership dependency ratio 350,000 60
Korea old 300,000 50 dependency ratio 250,000 40 China robot ownership 200,000 30 China old 150,000 20 Korea robot dependency ratio 100,000 ownership 10 50,000
- - 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019 2022 2025 2028 2031 2034 2037 2040 2043 2046 2049
Japan old age dependency China old age dependency Korea old age dependency Japan robot ownership (RHS) China robot ownership (RHS) Korea robot ownership (RHS)
Source: IFR, World Bank 35% robot ownership CAGR over 2014-20E We estimate that China's robot ownership CAGR will be about 35% over 2014-20, assuming a 6% GDP per capita CAGR, a 0.5% population CAGR, and a similar robot density ratio when economic strength reached the levels of Japan in the mid-1980s and Korea in the early 2000s.
Figure 156: Robot ownership growth forecasts 2014-20 China 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2020E CAGR GDP per capita PPP (US$, adjusted) 5,575 6,048 6,303 6,725 7,308 8,032 8,729 9,355 10,025 10,711 15,191 6% Population (mn) 1,308 1,314 1,321 1,328 1,335 1,341 1,347 1,354 1,361 1,368 1,401 0% Robot ownership ('000 unit) 12 17 24 32 37 52 74 97 133 182 1,128 35% Robot ownership (unit/US$) 1.59 2.18 2.87 3.56 3.83 4.86 6.32 7.65 9.73 12.44 53.00
Japan 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 GDP per capita PPP (US$, adjusted) 13,754 14,078 14,307 14,773 15,331 15,679 16,251 17,185 17,943 18,789 Robot ownership ('000 unit) 21 32 47 67 93 115 143 178 221 274 Robot ownership (unit/US$) 12.95 19.06 27.34 37.87 50.11 60.52 72.15 84.35 99.92 118.06
Korea 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 GDP per capita PPP (US$, adjusted) 12,860 13,501 12,634 13,890 14,998 15,481 16,498 16,882 17,589 18,227 Robot ownership ('000 unit) 25 30 31 34 38 41 44 48 51 62 Robot ownership (unit/US$) 42.09 48.68 53.75 51.98 53.88 56.29 56.34 59.22 60.71 70.18 Source: IFR, World Bank, The Maddison-Project 2013 version, Credit Suisse estimates Chinese companies' market shares to expand in the next 3-4 years MNCs are the dominant automation players in China, especially in the high-end markets. MNCs' cumulative market share gradually declined from 75% in 2009 to 67% in 2014, according to Gongkong.
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Figure 157: Local automation players' market shares
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0% 2009 2010 2011 2012 2013 2014
Source: Gongkong Despite likely witnessing strong demand due to the socio-demographic changes, we think global brands are still the key beneficiaries because (1) end-users are still prone to buy global brands rather than Chinese products, and (2) weaker macroeconomic conditions will postpone capex for automation upgrades. We expect Chinese companies to take more market share in about three to four years from now, as (1) the benefit of the first batch of automation upgrades becomes visible, (2) automation solutions turn more affordable for mass adoption, and (3) government policies start to be effective. We expect Chinese automation makers' market share expansion could accelerate about We expect Chinese 3-4 years from now, for the following reasons: automation makers' market share expansion could (1). On the demand side, Chinese firms have a better chance in end-users' next accelerate about 3-4 years automation upgrade cycle from now Computer, communications, and consumer electronics (3C) are what Chinese companies target (auto is dominated by global companies and the entry barriers are very high), whose high requirements for precision, speed and environmental conditions could make for automation players extending the technology to other sectors in the long term. Leading consumer companies, including Suning (SSI Schaefer, Dematic), Hangzhou Tobacco (Swisslog), Haier (System 3R), JD (all equipment imported), Midea (all equipment imported), Wahaha (Siemens, Sacmi, Krones, Husky), are using imported equipment for the latest round of automation upgrade. A typical practice is purchasing foreign components/equipment and doing the system integration internally. We have seen a rising number of Chinese participants adopting this practice. In the long run, when end-users have a better understanding of automation systems and know what functions they want, they will seek cheaper local solutions with good service, customisation and good functionality for the next round of automation upgrades. (2). On the supply side, Chinese firms will have better technology, capacity and human capital after this round of fund raising and investment We see a new round of investment cycle by Chinese industrial companies in the context of strong government support to intelligent manufacturing and the development of the internet. Organic growth, including R&D projects, capacity expansion and investment on human capital, usually takes a few years to achieve, but M&As are subject to various uncertainties. We find that new capabilities will largely be ready for commercial application in 2017-18, based on our bottom-up estimates (see the chart below).
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For example, Han's Laser announced a placement to fund its high-power laser generator project and robot project, which need approvals (at least a few months for shareholder and CSRC approvals), construction (two years), and ramp-up (three years). Siasun's capacity expansion project on industrial robots, special robots and digital factory will take about two years to finish construction, one year to ramp up production, and seven years to reach full production.
Figure 158: Estimated capacity expansion and new R&D centre construction timelines of major automation players Projects 2014 2015 2016 2017 2018 2019 2020 2021 2022 Siasun: industrial robot, 3D printer, numerical factory Han's Laser: High-power semiconductor components, and fiber laser Han's Laser: cutting and welding system; robot automation; fragile material processing
Megmeet: Zhuzhou manufactory 2nd stage
Siasun: high-end equipment and laser Oriental Material Handing: industrial automatic smart logistics equipment Great Star: intelligent robot smart cloud service platform Top Star: robot and industrial automation manufactory
Sciyon: equipment automation production line Huazhong Numerical: AC servo production line Cheiftain: Medical and bio-engineering automation control system Greatoo: industrial robot and intelligent production line
Inovance: mass transmission inverter,renewable automobile drive control Estun: a new robot manufacturing workshop with an annual capacity of 2000 sets Brilliant: intelligent grinding robot R&D center 2014 2015 2016 2017 2018 2019 2020 2021 2022 Han's Laser Top Star
Innovance New capacity and R&D centres come Estun out Cheiftain Oriental Material Handing
Construction Initial stage Full Capacity In use Source: Company data, Credit Suisse estimates (3). Government support takes some time to be effective The Chinese government has long wanted to build its own intelligent manufacturing Made in China 2025 is the capability over the past decade. The State Council and the Ministry of Industry and most important policy Information Technology (MIIT) have issued high-level policies setting up development targets and areas. Favourable tax terms and government subsidies are offered as well. 'Made in China 2025' is the most recent and systematic guideline setting targets, strategy, and focus areas. Detailed executable policies will be announced in the next few months (including 'Robot Industry 13th Five Year Plan'). Project initiation, feasibility studies and government subsidy application all take time to translate into new orders. We believe that the central government is fully aware of the urgency of improving manufacturing capability and quality rather than capacity, in the context of the changing global competitive landscape. The global manufacturing industry may not follow a nomadic pattern—a one-way direction towards countries with low labour costs. The advent of the information era and development of the internet have changed the importance of productivity, and developed countries are gaining an edge through better educated workers, geographical vicinity to end-users, solid infrastructure and good operating
Young China 97 28 October 2015 environments. With Germany having announced "Industry 4.0" and the US its "Advanced Manufacturing Plan", the labour-intensive cost-driven Chinese manufacturing companies are facing tremendous never-seen-before challenges.
Figure 159: Key points of 'Made in China 2025'
9 tasks 10 sectors
Improving manufacturing innovation New information technology
Integrating information technology and industry Numerical control tools and robotics
Aerospace equipment Strengthening the industrial base, Ocean engineering equipment and high-tech vessels Fostering Chinese brands, Railway equipment Enforcing green manufacturing Energy saving and new energy vehicles
Promoting breakthroughs in 10 key sectors, Power equipment Advancing restructuring of the manufacturing sector New materials
Promoting service-oriented manufacturing and manufacturing-related services industries Biological medicine and medical devices
Internationalizing manufacturing Agricultural machinery
Source: State Council Han's Laser is better positioned We think Han's Laser is a good quality name that will likely benefited from the trend. Han's Laser is a good Although Chinese companies lag global peers, the company has a leading market position quality name that will likely in its own areas. benefit from the automation trend Han's Laser: vertical integration and product expansion Han's Laser is the world's largest laser marking equipment manufacturer with 40% market share. Its steady growth (16% EPS CAGR) was a showcase of the global consumer electronics boom.
■ China's laser market growth (15%) is likely to be one of the fastest globally (5-10% CAGR) by 2020. The advantages of laser have been gradually recognised and lowering cost has increased penetration. Rising demand for customised and better designed 3C industry products creates a healthy demand for laser equipment. Rising competition between consumer electronics companies also makes them seek better processing techniques including laser. Among different laser technologies, fiber laser is taking market share thanks to higher conversion efficiency, lower energy consumption and flexible production design. Han's Laser has been promoting the technology through partnership with IPG.
■ Meanwhile, Han's Laser is expanding into the high-power cutting and welding market, which is estimated to be a much bigger market than marking. Laser cutting saves mould cost and is faster; laser welding brings better strength and lighter weight than conventional welding. Both techniques are suitable for high-end manufacturing, including aerospace, high-speed trains, defence, small components, etc. To increase profitability and reduce dependence on key component suppliers, Han's Laser is
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vertically expanding into high-power laser generator, which has a high entry barrier, high margin and with a sustainable replacement market. We think Han's Laser has a chance to be successful in this vertical integration because of its track record in the low-power market and cooperation with international technology leaders.
Young China 99 28 October 2015 Service robots overview and China positioning Sam Li +852 2101 6775 ([email protected]) Kyna Wong +852 2101 6950 ([email protected]) The robotics market contains two major segments: industrial robots and service robots. The robotics market contains two major ■ Industrial robotics: A technology used to automate a variety of manufacturing segments: industrial robots processes across the automotive, electrical and electronics, food and beverage, and service robots. semiconductors industries. Industrial robots are programmed and automated with high precision and sustainability to control manufacturing processes. They help in enhancing manufacturing efficiency as well as improving the quality of products to a great extent by maintaining stability in performance. Moreover, they could offer low operational expenses that help vendors increase throughput and profitability when labour costs are sensitive.
■ Service robotics: An intelligent machine that performs a variety of tasks that might be simple or complex, time-consuming, and repetitive. Service robots are classified into two wide divisions: professional robots and personal/domestic robots. Professional robots have the ability to work in challenging environments such as underwater, defence, and security and surveillance applications. Personal/domestic robots can perform household applications such as window and floor cleaning, grass mowing, vacuuming, personal transportation, home security and surveillance, and personal aid and assistance.
Figure 160: Robotic system categories
Robotics
Industrial Service Robotics Robotics
Personal/ Other Professional domestic Robots
- Automotive Household Entertainment - Electrical/ electronics - Defense - Metal & machinery - Field - Chemical/ rubber/ plastics - Logistics - Food & beverage - Medical - Consumer electronics - Construction - Semiconductors - Mobile - Others - Cleaning - Inspection - Underwater
Source: Credit Suisse research Key drivers of China's service robotics market We believe the major key initiatives to drive China's service robotics market are: (1) ageing China's service robotics population, (2) increase in labour cost and (3) enhancing service quality and safety. market is driven by: (1) an ageing population, (2) The labour wage in China has rapidly risen with a 17% CAGR since 2002-12. The increase in labour cost and government has set stricter employee benefit requirements, further adding costs to labour- (3) enhancing service intensive companies in past years. On the other hand, China is rapidly entering into the quality and safety. phase of an ageing society, with the old dependency rate reaching 13% in 2014 (vs 7% 50
Young China 100 28 October 2015 years ago and 10% a decade ago). Net-net, it leads to labour shortage and cost up in China employment market.
Figure 161: Rapid increase in hourly wages in China Figure 162: Ageing economy should lead to higher labour (2002-12 CAGR) costs in China 14% Brazil 12%
Korea 10%
Taiwan 8%
Germany 6%
4% Japan 2% USA 0%
China
1996 2002 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1999 2005 2008 2011
0% 5% 10% 15% 20% Old age dependency
Source: Bureau of Labour Statistics Source: NBS The use of service robots could finish tasks for the aged who are physical challenged. In addition, service robots can reach inaccessible places for different purposes such as unmanned aerial vehicle for movie recording. According to IFR (International Federation of Robotics), the total number of service robots sold globally in 2014 was 4.7mn units, up 28% YoY and sales hit US$6.0 bn. In terms of shipment, the majority of service robots (4.7 mn) sold were for personal/domestic use such as vacuum and floor cleaning robots. Professional service robots shipped 24k units last year, up 11% YoY. In terms of revenue, 63% (US$3.8 bn) of total sales was contributed by professional service robots and personal/domestic use robots sold for US$2.2 bn in 2014.
Figure 163: Global sales of service robots in 2014 Figure 164: Global shipment of service robots in 2014 Professional service robots 1%
Personal/dome stic user service robots 37% Professional service robots Personal/dome 63% stic user service robots 99%
Source: IFR Source: IFR
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Key trends in China's service robotic market With rapidly ageing populations, we believe service robots will play a vital role in the assisted living market. We believe that demographics is one of the most important factors for rising automation. We find that robot ownership accelerated when the old dependency ratio reached 10-15 (early 1980s for Japan and 2010 for Korea). China reached a level of 13 as of 2014, suggesting that it is already on a faster track. Secondly, we see the trend of increasing demand in China when robots are getting more affordable. Meanwhile, China should incubate the domestic content and will be accelerating in robot development.
Figure 165: China has reached the take-off point of robot ownership based on old age dependency 14 200,000 180,000 12 160,000 10 140,000 120,000 8 100,000 6 80,000
4 60,000 40,000 2 20,000 - 0 1999 2001 2003 2005 2007 2009 2011 2013
China robot ownership (RHS) China old age dependency
Source: IFR, World Bank Major market segments in service robots Household robots In personal/domestic robots, household robots account for a third of the market. Their price (few hundreds US$) is generally affordable for the mass market. Household robots who perform tasks such as vacuuming, window and floor cleaning, and air purifier etc. assist human beings to complete housework in indoor areas. We believe this market is in a high growth stage, due to: (1) simpler requirements on technology and its intelligence and (2) changing demographic demands. Household robots use existing technology to incorporate the innovation of application and increase the functionality of the machine. The underlying goal of the machine is to complete the single task such as cleaning the floor or windows. It requires less intelligence of the machine itself. We see a change in demographic demands given the global economy is shifting to Asia region. An increase in income allows people to go in for high- end products. Current market players are dominated by iRobot, Ecovcs (China) and Vorwerk. Other Asian players such as LG, Samsung, Sony and Toshiba also make robotic vacuums, but only account for a small portion (<5% share globally).
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Figure 166: iRobot Scooba 400 floor cleaning robot Figure 167: Ecovcs CR130 floor cleaning robot
Source: Company Source: Company Special purpose robots Medical robots assist surgery and therapy with special purposes/ functions such as assistance in surgeries, pill dispensing, needle placement, diagnostics or rehabilitation etc. These robots are the most valuable service robots with an ASP of cUS$1 mn including accessories and services. Despite it being a niche market, it is relatively developed. Several hospitals have implemented medical robots to offer remote consulting facilities to their patients. Global key players are Elekta, Intuitive Surgical and Integrated Surgical Systems. In China, Tinavi is a company providing medical solutions like orthopaedic robot navigation system. Another kind of medical application is rehabilitant robots or handicap assistance robots, which are more personalised than surgery robots.
Figure 168: Intuitive Surgical medical robot solution Figure 169: Tinavi robot navigation system
Source: Company Source: Company
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Figure 170: Cyberdyne's HAL for medical use Figure 171: Rex Bionics for rehabilitation
Source: Company Source: Company Defence robots into mass market Defence applications accounted for 45% of the total shipment of professional service robots last year. 80% of units sold were unmanned aerial vehicles (UAV). Other applications include unmanned ground base vehicles, demining, hazard disposal, fire fighting etc. These defence robots allow operators to monitor dangerous situations remotely. Also, they are developed to replace human beings to handle dangerous environments with manageable risks and costs. Apart from military use, UAV can be used in mass market for entertainment. We think Chinese players are leading in the affordable consumer UAV market. The ASP can reach down to few thousands of Rmb for small vehicles. Industrial/commercial UAVs can sell at few hundreds thousands of Rmb in China.
Figure 172: DJI NAZA-M unmanned aerial vehicle for consumer market
Source: DJI
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AI (artificial intelligence) robots The next generation of service robots should use artificial intelligence (AI) to develop independent robots that can perform a variety of tasks without human supervision. The market is still in an early stage; we believe nowadays AI robots are not "real" enough yet. The AI robots development is led by US and Japan makers. Softbank has launched its first personal robot "Pepper" and started sales in Japan since June 2015 with a selling price of ¥198,000 (cUS$1,900). Pepper features many input/output (I/O) devices including microphones, camera and sensors. As said, it is still not a "real" AI for domestic use, but good for marketing and decoration. In order to develop "intelligence" in the robot, we need a "big brain". Last year, Microsoft launched the personal assistance Cortana at its developer conference. It enables users to set reminders and speak to Cortana with voice commands. It also uses information from Bing (MSFT's search engine) to get answers to the user. It is now available to all users of Windows 8.1 (phone) and Windows 10 (desktop) in 2015. Google acquired a British AI company DeepMind Technologies in early 2014. The team aims to formalise intelligence not only by implementing into machines, but also understanding the human brain. In China, the search engine leader Baidu's IDL has been developing the "Baidu Brain" to simulate human intelligence. The "brain" has reached a 2-3 year old kid's intelligence level.
Figure 173: Softbank's personal robot, Pepper Figure 174: Microsoft's AI—Cortana
Source: Company Source: Company
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Smart heart for service robots What is the heart of a robot made of?
Figure 175: What is a robot made up of? Figure 176: Teardown of Pepper's head
OS, Cloud database Input: Output: Touch/remote Visual (display/LED) Visual (camera) Voice (speaker) Voice (mic) Movement (motor) Temperature CPU Humidity Speed Direction etc.
Semi content: CPU/MCU, memory, connectivity, display/touch controller, MEMS/sensors, image processor, audio, analog etc.
Source: Company data, Credit Suisse estimates Source: Nikkei In general household robots, the core processor is simply a microcontroller (MCU); it can be 8-/16-/32-bit MCU for algorithm and command processing. The major function of MCU is to control the input/output (I/O) devices. A set of commands is programmed in the chip. Other essential components include memory, analog and power components. Sensors are an important input device in the robot system. A vacuum cleaning robot is embedded with five sensors: contact, magnetic, gyroscope, optical and infra-red sensors, which provide signals to MCU for decision making. MCU will then calculate the correct reaction to the external environment and control the output devices. In an advanced robot design, it would require a more powerful processor to handle the complicated input signals—more sensor input, remote command or voice command etc. For example, Pepper features dual Intel Atom 1.6GHz CPU, 2 cameras, 4 mics, 5 touch sensors, 2 gyro sensors, 3D sensor, 2 sonar sensors, 6 laser sensors, 10.1" touch display, 802.11 a/b/g/n Wi-Fi and Ethernet. The robot is running in NaOqi OS. To achieve an AI robot, we need to build the heart with a powerful processor and a well-established cloud database. System-on-chip (SoC) for robotics
In order to speed up the thinking capability of a robot, the increase of processing power is We see two rims of potential essential and it will adopt advanced semiconductor technology. Other than CPU upgrade, robot development for China we see two rims of potential robot development for China chipset companies: (1) a cloud- chipset companies: (1) a based SoC to enhance processing efficiency for internet search and (2) an SoC to offer cloud-based SoC to integrated sensor data feedback. enhance processing A cloud-based SoC, which leverages the virtualisation technology, can enable a faster efficiency for Internet search feedback of the search results to the robot. The robot does not require a very powerful and (2) an SoC to offer processor to handle the search function itself. The heavy loading tasks will be executed on integrated sensor data the server side. The main processor of the robot only needs to retrieve the data, perform feedback. simpler logic algorithm and control I/O devices. Secondly, due to the increasing complexity of sensor technology in a robot, a motion co- processor can be implemented to collect sensor data from a batch of sensors and offload the collecting and processing of sensor data from the main processor. We believe near term it is more challenging for China to develop a powerful computing processor for advanced robot applications. However, we believe China is positioned in an up growing robotic market and capable of providing a low-end general purpose processor for household robots. We also expect the two rims of robot SoC could provide a new market segment for Chinese chipset companies.
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Figure 177: BOM of robotic vacuum cleaner Components Device ASP ($) Chips MCU 11.11 RF Transceiver 2.9 IR sensors 0.88 Audio Amplifier 0.6 Serial flash memory 0.55 MOSFET 0.15 General purpose logic 0.15 Analog 0.61 Other 0.23 Optical Camera 24 Laser Rangefinder 10 Sensors Contact sensor 13 Magnetic sensor 2.89 Gyroscope sensor 2.5 Optical sensor 0.81 LED UV LED 0.65 Infrared LED 0.44 Total 71.47 Source: Chipworks, Credit Suisse research
Young China 107 28 October 2015 13th five-year plan: Water in focus Trina Chen +852 2101 7031 ([email protected]) Joy Zhang +852 2101 7083 ([email protected]) We expect the upcoming 13th five-year plan for China's environment sector to provide a We expect the upcoming consistent policy push, with a more aggressive investment plan, and higher targets for air 13th five-year plan to unveil and water quality. Yet ultimately, the focus would be more on water, in our view. Key a more ambitious things to watch: (1) Total environment investment is likely to reach Rmb10 tn over 2016E- investment roadmap, higher 20E, twice as much as in the 12th five-year plan. It implies that the annual investment in quality targets, and bring the the sector could reach Rmb2.4 tn or 2.7% of the GDP by 2020E (from 1.8% in 2014A). (2) most positive policy New pollutants are likely to be added to the targets, such as VOC, total N and P. (3) We changes for the water sector expect the water sector to receive the most incremental positive policy changes ahead, including nearly half of the total investment, and notable changes in water quality requirement aimed at further cutting discharge of total N and P, and NH4-H—leading to potential further standard upgrade for the waste water treatment facilities.
Figure 178: Environment sector as percentage of GDP is expected to rise further Investment in environment Environmental related investment (Rmb bn) as % of GDP (%) would double in the 13th 3,000 2.7% 3.0% five-year plan, or 12% Env-related inv (Rmb bn) 2.5%2.6% 2.4% CAGR 2,500 % of GDP 2.3% 2.5% 1.9% 2.0% 1.8% 2,000 1.7% 2.0% 1.6%1.5% 1.5% 1.6% 1.4% 1,500 1.3% 1.5% 1.1% 1.1%1.2%1.2% 1.2% 0.9% 1.0% 1,000 1.0%
500 0.5%
- 0.0%
2008 2009 1999 2000 2001 2002 2003 2004 2005 2006 2007 2010 2011 2012 2013 2014
2015E 2016E 2017E 2018E 2019E 2020E
Source: CEIC, Credit Suisse estimates Higher standards The general direction of the 13th five year plan is higher standards of air and water quality targets, and continued reduction in discharge of key pollutants. We also expect additional pollutants to be included in the monitoring system, such as VOC, total N and P, apart from COD, Ammonia nitrogen, SOx and NOx targets that were included in the 12th five-year plan. Our discussions with industry contacts also suggest that more emission surveillance and monitoring system would be implemented to enhance the enforcement of the new standards. We believe the policy will continue to encourage higher investment demand, as both treatment penetration rate and treatment standards improve. It would also lead to bigger market size, driven by higher treatment charges to support the higher treatment cost (due to higher standards) and higher unit profit (to justify higher unit investment).
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Figure 179: Potential breakdown, by segment, of 13th five-year plan investment (Rmb10 tn) 13th-five year investment plan breakdown (CS estimates)
water-related Water-industrial air-related 7% Water- other env related municipal 14%
Others 34%
Water- remediation 18%
Air-related Water-others 17% 10%
Source: Water Act, Air Act, MEP, Credit Suisse estimates Water: Most positive policy changes ahead We believe the focus of the 13th five-year plan on improving water quality, including Higher water standards are potential higher discharge standards of waste water treatment plants, is likely to be the likely to be the most positive most positive incremental policy change for the environment sector, and the water incremental policy change segment. for the environment sector The change is consistent with heavyweight investments in the sector, especially the planned Rmb1.8 tn investment in water systems and resource remediation (from the Water Act), or nearly 50% of the planned investment in the water segment, in order to improve water quality. Given China's tight water resources, waste water treatment plants are also expected to reduce further discharges, especially N, P and NH4-H, based on our discussions with industry contacts. As a result, we see potential acceleration of the upgrade from sub-grade I-A plant to I-A standards, and likely further boost from Grade I-A (current highest standard) to a new level, possibly the quasi-surface water grade IV standard that benchmarks discharge limits of surface water grade IV, aiming to lower total N, P and NH4-H discharged by 30-70%.
Figure 180: China water standards comparison—surface water, waste water treatment China COD BOD SS N P NH4-N mg/L mg/L mg/L mg/L mg/L mg/L Surface water Class I 15 3 - 0.2 0.0 0.2 Surface water Class II 15 3 - 0.5 0.1 0.5 Surface water Class III 20 4 - 1.0 0.2 1.0 Surface water Class IV 30 6 - 1.5 0.3 1.5 Surface water Class V 40 10 - 2.0 0.4 2.0 WWT– Quasi surface water IV (potentially new) 30-40 6-10 - 10.0 0.3-0.4 1.5 WWT plant Level I-A 50 10 10 15.0 0.5 5.0 WWT plant Level I-B 60 20 20 20.0 1.0 8.0 WWT plant Level II 100 30 30 - 3.0 25.0 WWT plant Level III 120 60 50 - 5.0 - PH, Hg, Cd, Cr, Pb, As are also included in the standards yet not key monitoring factors Source: Company data, Credit Suisse estimates
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Earnings: Higher for longer The accelerated five-year investment plan, combined with the strong project pipeline of the The upcoming 13th five-year major operators, will improve the visibility of the sector's growth outlook beyond 2017E. plan, combined with the We estimate 2020E earnings of the top water operators will be 10-22% higher than our strong project pipelines of previous estimate, under our new base case with accelerated water plant upgrades, the major operators, should including 100% grade I-A conversion and 50% grade quasi-surface water IV conversion improve the visibility of the (our revised base case). Under our 'blue-sky' scenario, a 100% grade quasi-surface water sector's growth outlook IV conversion would lead to 27-34% earnings improvement on 2020E. In addition, the beyond 2017E strong project pipeline also underpins growth in operations over 2017E-20E—as of 3Q15, we estimate projects on hand for most listed operators are on average nearly 200% above their 2014A operating capacity, with the industrial waste segment leading the way, followed by WTE, and water. Figure 181: Earnings revision with improved growth visibility 2020E EPS chg versus prior estimates (%) New base case versus prior 50% "Bluesky" versus prior 40%
30%
20%
10%
0% BEW CEI SIIC Dongjiang New base case - more water plant upgrades, combined with updates project pipeline "Blue sky" case - full water plant upgrades for BEW, CEI, and SIIC, full HWT target for Dongjiang Source: Company data, Credit Suisse estimates What plant upgrades mean to earnings For waste water treatment plants, we estimate unit upgrade capex could end up the same as the initial investment, if upgrading sub-grade I-A plants to meet with the higher SS (suspended solids), total N (Nitrogen) and P (Phosphorous) requirements. And an additional 100% of the initial investment may also be required to tighten the discharge to quasi-surface water IV standards. The challenge is less about COD (chemical oxygen demand) and more about lowering N, P and NH4-H (Ammonia), especially for northern China. We estimate unit EBITDA would move up 2.0-3.5x from the Rmb0.23/t at the low end to potentially Rmb1.05/t post the upgrade, in order to sustain a "reasonable return" (an IRR of 10% in our estimates). Given the higher operating cost, we estimate the change would also lead overall waste water treatment tariffs to more than double.
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Figure 182: Potential further upgrade in waste water plant standards in 13th-five year plan Unit EBITDA (Rmb/t) Unit CAPEX (Rmb/t) 1.60 16.0 Potential quasi-Surface 1.40 water IV standard 14.0 COD <30; N <10; 1.20 N, P upgraded, fully P<0.3~0.4; NH4-H<1.5 12.0 meeting I-A 1.00 COD <50; N <15; 10.0 P<0.5; NH4-H<5 0.80 SS upgraded, but N, 0.30 8.0 P not meeting I-A 0.60 lower grade plant standard 6.0 with SS, N, P not 0.41 0.40 meeting I-A standard 4.0 0.10 0.20 2.0 0.23 0.00 0.0 Grade II, IB (SS, N, P poor) Grade II, IB (N, P poor) Grade I-A Quasi-surface water IV
Discharge standard upgrade Source: Company data, Credit Suisse estimates For listed companies, we estimate the acceleration of the current Grade I-A upgrade would lead to 1-6% earnings (2020E) and 0.2-1.2% DCF changes. And an additional upgrade to the quasi-surface water IV grade (assuming by 2020E) could lead to further 12-38% earnings and 4-23% DCF changes, assuming 100% conversions (we used 50% in our model). Key beneficiaries are: BEW, SIIC and CEI (through CE water).
Figure 183: Scenario analysis of WWT standards upgrade BEW SIIC CEI % of WWT profit in total (2020E) % 72% 88% 29% % of sub grade I-A plants (in total pipeline as of 2015E) % 55% 42% 30% 100% I-A upgrade by 2020E Chg. in EPS (2020E) % 2.3% 5.8% 1.4% Chg. in DCF (2016E) % 0.2% 1.2% 0.4% Chg. in gearings (2020E) % 5.6% 7.3% 2.0% 100% Quasi-Surface water IV upgrade in 2020E Chg. in EPS (2020E) % 37.9% 37.9% 12.3% Chg. in DCF (2016E) % 21.0% 22.8% 4.4% Chg. in gearings (if done in year one year) % 97.0% 52.8% 20.5% Source: Company data, Credit Suisse estimates Strong project pipeline to support 2017-20E growth Additions to operators' project pipelines through new project sign-ups and acquisitions As of 3Q05, we estimate the continue to remain strong for most waste treatment operators in 2015E, driven by projects on hand of most underlying demand support and the relatively sensible economics of the projects for listed operators are on capacity investment. As of 3Q15, we estimate the projects on hand (including operations, average nearly 200% those under construction and in preparation) of most listed operators are on average above the 2014E operating nearly 200% above 2014A's operating capacity, underpinning continued growth in capacity, underpinning operations for 2017-20E. Industrial waste as a segment has seen a robust project pipeline, continued growth in followed by WTE, and lastly the water segment. operations from 2017-20E Improving earnings quality We expect improving earnings quality for the sector, as contribution from operations to We expect the sector to total profit should rise from 58% in 2015E, to 64% in 2017E, and potentially to 73% by show improving earnings 2020E, driven by accelerating growth of profit from operations (versus from EPC and BOT quality, as contributions accounting profit). Specifically, we estimate the average annual growth rate of profit from from operations to total operations of the sector to accelerate from a 39% CAGR over 2013-15E to 47% over profit rise, as growth in profit 2015-17E, due to volume growth of waste treated, coupled with improving unit profit of from operations accelerates select operators (through technology upgrade, plant standard upgrade, or better projects
Young China 111 28 October 2015 mix). There are emerging risks such as lower quality projects, competition, and longer execution time. Figure 184: Improving earnings quality—% of profit from operations in total 2014A 2015E 2016E 2017E 2018E 2019E 2020E GD Inv 100% 100% 100% 100% 100% 100% 100% CT Env 99% 93% 94% 99% 100% 100% 100% SIIC 91% 89% 92% 95% 96% 97% 98% Djiang 90% 85% 86% 86% 85% 84% 84% TJC 88% 88% 89% 89% 89% 89% 89% Canvest 88% 75% 85% 76% 74% 74% 82% BEW 63% 60% 62% 68% 75% 83% 91% Dgreen 60% 56% 60% 59% 69% 82% 92% BJC 57% 59% 72% 72% 71% 75% 87% CEI 52% 58% 62% 64% 71% 78% 83% SdGlobal 13% 16% 19% 22% 26% 29% 31% Conch V 27% 12% 20% 27% 33% 36% 40% SD Env 8% 13% 16% 21% 26% 29% 31% Yonker 6% 8% 15% 25% 23% 20% 17% GD Tech 0% 0% 0% 0% 0% 0% 0% Average 60% 58% 62% 64% 67% 70% 73% Source: Company data, Credit Suisse estimates Figure 185: Improving OCF (adjusted) from 2014-17E OCF-adjusted (Rmb mn) 6,000
5,000
4,000
3,000
2,000
1,000
0
CEI
V
TJC
GD
BJC
SIIC
SDE
SDG
Tech
BEW
Djiang
Conch
GD Inv GD
Yonker
Dgreen CT Env CT 2014A 2017E Canvest Source: Company data, Credit Suisse estimates Rising contribution from operations We expect the sector to show improving earnings quality, as contributions from operations to total profit rises, driven by accelerating growth in profit from operations (versus from EPC and BOT accounting profit). We view this trend as meaningful and improved earnings growth visibility should lead to a multiple rerating of the sector. Specifically, we estimate the average annual expansion rate in profit from sector We estimate the average operations to accelerate from a 39% CAGR in 2013-15E to 46% in 2015-17E, due to the annual growth rate of profit continued strong volume growth of waste treated, coupled with the improving unit profit of from operations of the selected operators (through technology upgrades, plant standard upgrades or a better sector to accelerate from project mix). 39% CAGR in 2013-15E to 46% in 2015-17E Risks that come with the growth While we see strong and longer growth in the sector, emerging lower project quality, rising Emerging lower project competition and longer execution times for new projects (mostly related to land and quality, rising competition, residents) are risks that could lead to haircuts in the returns of municipal waste projects, in and longer execution time our view. We see a better outlook for most industrial waste treatment, due to lower for new projects (mostly penetration rates and limited competition, yet there are notable volume slowdowns in related to land and selected segments with higher treatment rates, such as industrial waste recycling, and residents) are risks lower entry barriers, such as appliance recycling.
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The VAT: Mild financial impact, not a new trend We view this VAT policy as a result of uncoordinated government efforts, rather than the We view this VAT policy as start of a long-term trend. However, given the current system and policy, it provides an a result of uncoordinated option to the government to collect meaningful tax income from a sector with sustainable government efforts, rather (and growing) treatment demand in the long run, and eventually will be passed through to than the start of a long-term end-waste generators, if industry supply-demand remains in balance or favourable. trend Potential reversion or VAT reduction, though a small possibility, would lead to a strong rebound in equities, in our view. Top picks We remain positive on the China Environment sector, with solid fundamentals Despite China's slowdown, underpinned by robust treatment demand growth, non-stop upgrade potential and with its rising contribution to consistent policy support. Despite the slowdown in China's broader economy, the sector, GDP, China's environment with its rising contribution to GDP, stands out perhaps more than before, in our opinion. sector is standing out We see a potential multiple rerating in 2016E, on the back of an improving earnings quality perhaps more than before, driven by accelerating profit from operations, combined with a more visible growth outlook in our opinion for 2017-20E. The upcoming 13th five-year plan should not only serve as a positive catalyst, but should also likely lead to the most incremental positive policy changes for the water segment, through potential higher waste water treatment standards. Our top pick is BEW. Our top pick is BEW Our view on the waste water sector has become incrementally more positive and we see BEW as the largest beneficiary.
Figure 186: Recent EPS changes and earnings breakdown—China environment sector stocks under coverage Stocks Ticker Shr Rating Target Upside EPS chgs (%) P/E (x) price New Old New Old % 15E 16E 17E 20E 15E 16E 17E CEI 0257.HK 11.7 O O 18.5 17.3 59% -1% 0% -6% 22% 22 15 10 Dynagreen 1330.HK 4.5 O N 5.5 4.7 22% -1% 3% 1% 43% 17 12 8 Canvest 1381.HK 3.3 O O 5.6 5.7 70% -6% -9% -1% 8% 23 13 10 Conch Venture 0586.HK 17.4 O O 21.5 19.5 23% 0% 0% -8% -14% 13 14 12 Djiang 0895.HK 14.3 O O 23.0 19.0 61% -6% -7% -5% 24% 31 21 14 CT Env 1363.HK 2.7 O O 3.1 3.1 16% -2% -6% -3% 6% 25 19 16 BEW 0371.HK 5.9 O O 8.0 6.2 35% -1% 2% -3% 10% 23 18 16 SIIC SIIC.SI 0.9 O O 1.5 1.3 73% -12% -3% -8% 16% 21 14 11 GD Inv 0270.HK 10.5 N N 12.0 11.6 14% -2% 1% -11% -2% 16 16 13 Sound Env 000826.SZ 38.1 N N 41.0 32.0 8% 6% 8% 8% 2% 31 26 22 Yonker 300187.SZ 31.2 U U 11.0 19.0 -65% 0% 16% -26% -60% 78 66 72 BJC 600008.SS 9.8 U U 8.7 10.0 -11% 9% 1% 3% -8% 34 30 21 Sound Global 0967.HK 7.0 O O 11.1 11.1 58% 0% 0% 0% 0% 10 8 7 TJC 1065.HK 4.9 N U 5.2 5.2 7% 12% 18% 6% -27% 15 13 13 GD Tech 1296.HK 0.8 N N 0.75 0.75 -6% 0% 0% 0% 0% n.a. 26 23 * Yonker EPS chgs adjusted for share issuance. Table priced as of 12 October 2015 from our recent published report. Source: Company data, Credit Suisse estimates
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Companies Mentioned (Price as of 27-Oct-2015) 58.com Inc. (WUBA.N, $51.26, OUTPERFORM[V], TP $66.0) Alibaba Group Holding Limited (BABA.N, $79.44, OUTPERFORM, TP $98.0) Anta Sports Products Limited (2020.HK, HK$21.95, OUTPERFORM, TP HK$22.5) Beijing Capital Co., Ltd (600008.SS, Rmb11.0) Beijing Enterprises Water Group Limited (0371.HK, HK$6.44, OUTPERFORM, TP HK$8.0) CAR Inc. (0699.HK, HK$13.7, OUTPERFORM, TP HK$22.0) CT Environment (1363.HK, HK$2.67) Canvest Environmental Protection Gp Co Ltd (1381.HK, HK$3.32) China Conch Venture Holdings Limited (0586.HK, HK$17.78) China Everbright International Ltd (0257.HK, HK$12.6) China Harmony New Energy Auto Holding Limited (3836.HK, HK$5.38, OUTPERFORM[V], TP HK$8.8) China Intl’ Travel Service (601888.SS, Rmb55.45, OUTPERFORM, TP Rmb68.0) Ctrip.com International, Ltd. (CTRP.OQ, $88.63, OUTPERFORM[V], TP $109.05) Dongjiang Environmental Company Limited (0895.HK, HK$14.96, OUTPERFORM[V], TP HK$23.0) Dynagreen Environmental Protection (1330.HK, HK$4.59) Geely Automobile Holdings Ltd (0175.HK, HK$4.09, OUTPERFORM, TP HK$5.7) Guangdong Investment Limited (0270.HK, HK$11.22) Guodian Technology & Environment Group Corporation (1296.HK, HK$0.73) Haitian Flavouring & Food (603288.SS, Rmb34.52, OUTPERFORM, TP Rmb41.0) Han's Laser Technology Co., Ltd (002008.SZ, Rmb26.15, OUTPERFORM[V], TP Rmb33.0) Inner Mongolia Yili Industrial Group (600887.SS, Rmb15.63) JD.com, Inc. (JD.OQ, $27.66, OUTPERFORM, TP $40.0) Kweichow Moutai Co., Ltd (600519.SS, Rmb215.25) Midea Group (000333.SZ, Rmb27.38) SIIC Environment Holdings (SIIC.SI, S$0.88) Sound Environmental Resources (000826.SZ, Rmb38.3) Sound Global Co. Ltd (0967.HK, HK$7.0) Suning Commerce Group Co., Ltd. (002024.SZ, Rmb16.15) Tianjin Capital Environmental Protection (1065.HK, HK$5.63) Vinda International Holdings (3331.HK, HK$16.14) Vipshop Holdings Limited (VIPS.N, $20.35, OUTPERFORM[V], TP $25.0) Wanda Cinema Line Co Ltd (002739.SZ, Rmb101.0, OUTPERFORM[V], TP Rmb122.0) Wisdom Holdings Group (1661.HK, HK$4.1, OUTPERFORM[V], TP HK$5.2) Yonker Environmental Protection Co., LTD. (300187.SZ, Rmb40.6)
Disclosure Appendix Important Global Disclosures Dick Wei, Evan Zhou, Anson Huang, David Hao, Bin Wang, Mark Mao, Trina Chen, Baiding Rong, Sam Li, Sophie Chiu and Kevin Yin each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for 58.com Inc. (WUBA.N)
WUBA.N Closing Price Target Price Date (US$) (US$) Rating 25-Nov-13 32.62 R 26-Nov-13 37.30 38.00 N * 03-Mar-14 50.60 42.00 17-Mar-14 49.48 R 08-Apr-14 43.45 42.00 N 10-Jun-14 42.64 R 18-Jun-14 45.62 42.00 N 21-Aug-14 46.73 40.00 12-Nov-14 46.12 42.00
09-Mar-15 44.38 41.00 REST RICT ED 21-Apr-15 72.36 90.00 O NEUTRAL OUTPERFORM 26-May-15 77.29 91.00 21-Aug-15 43.51 66.00 * Asterisk signifies initiation or assumption of coverage.
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3-Year Price and Rating History for Alibaba Group Holding Limited (BABA.N)
BABA.N Closing Price Target Price Date (US$) (US$) Rating 29-Oct-14 98.31 114.00 O * 05-Nov-14 108.67 118.00 29-Jan-15 89.81 113.00 09-Mar-15 82.53 112.00 08-May-15 87.06 114.00 13-Aug-15 75.11 105.00 16-Oct-15 71.99 95.00 * Asterisk signifies initiation or assumption of coverage.
OUTPERFORM
3-Year Price and Rating History for Anta Sports Products Limited (2020.HK)
2020.HK Closing Price Target Price Date (HK$) (HK$) Rating 19-Nov-12 5.92 7.52 O 18-Jan-13 8.41 8.21 10-Jul-13 7.04 9.40 06-Aug-13 9.23 10.69 08-Aug-13 9.74 10.88 09-Oct-13 11.02 12.14 03-Jul-14 12.38 14.92 07-Aug-14 14.53 15.52 26-Sep-14 15.00 16.91 14-Oct-14 17.57 18.90 11-Feb-15 14.03 19.50 29-Jun-15 17.64 20.20 17-Jul-15 18.32 22.50 * Asterisk signifies initiation or assumption of coverage.
3-Year Price and Rating History for Beijing Enterprises Water Group Limited (0371.HK)
0371.HK Closing Price Target Price Date (HK$) (HK$) Rating 09-Dec-13 4.41 5.30 O * 06-Mar-14 5.70 6.20 31-Mar-14 5.43 6.30 18-Aug-14 5.21 6.80 31-Mar-15 5.28 6.30 28-Aug-15 5.60 6.20 14-Oct-15 5.93 8.00 * Asterisk signifies initiation or assumption of coverage.
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3-Year Price and Rating History for CAR Inc. (0699.HK)
0699.HK Closing Price Target Price Date (HK$) (HK$) Rating 22-Oct-14 10.78 12.30 O * 03-Dec-14 12.02 12.30 N 11-Mar-15 11.24 16.00 O 20-May-15 19.88 22.00 * Asterisk signifies initiation or assumption of coverage.
OUTPERFORM NEUTRAL
3-Year Price and Rating History for China Harmony New Energy Auto Holding Limited (3836.HK)
3836.HK Closing Price Target Price Date (HK$) (HK$) Rating 28-Jul-15 6.28 8.80 O * * Asterisk signifies initiation or assumption of coverage.
OUTPERFORM
3-Year Price and Rating History for China Intl’ Travel Service (601888.SS)
601888.SS Closing Price Target Price Date (Rmb) (Rmb) Rating 16-Jun-15 71.09 100.00 O * 31-Aug-15 53.13 80.00 * Asterisk signifies initiation or assumption of coverage.
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3-Year Price and Rating History for Ctrip.com International, Ltd. (CTRP.OQ)
CTRP.OQ Closing Price Target Price Date (US$) (US$) Rating 26-Sep-13 56.68 60.00 O * 06-Nov-13 53.13 76.00 16-Jan-14 41.15 58.00 31-Jul-14 64.03 78.00 26-Nov-14 53.50 69.00 23-Mar-15 58.86 73.00 27-May-15 81.52 95.00 04-Aug-15 78.57 96.00 27-Oct-15 88.63 109.05 * Asterisk signifies initiation or assumption of coverage. OUTPERFORM
3-Year Price and Rating History for Dongjiang Environmental Company Limited (0895.HK)
0895.HK Closing Price Target Price Date (HK$) (HK$) Rating 09-Dec-13 5.81 8.40 O * 31-Mar-14 7.11 9.60 28-Apr-14 7.27 10.13 11-Aug-14 11.82 15.60 06-Oct-14 13.40 16.00 20-Oct-14 12.24 16.00 * 29-Apr-15 18.00 22.00 24-Aug-15 11.08 19.00 14-Oct-15 14.62 23.00 * Asterisk signifies initiation or assumption of coverage.
3-Year Price and Rating History for Geely Automobile Holdings Ltd (0175.HK)
0175.HK Closing Price Target Price Date (HK$) (HK$) Rating 08-Jan-13 4.07 3.50 U * 12-Mar-13 3.99 3.15 20-Mar-13 3.90 3.50 N 23-Oct-13 3.84 NR 11-Mar-14 2.63 3.00 N * 21-Jul-14 2.91 2.80 16-Dec-14 3.12 2.50 U 20-Jan-15 2.89 4.10 O 04-Mar-15 3.31 4.30
18-Mar-15 3.60 4.40 UNDERPERFORM 02-Apr-15 4.19 4.80 NEUTRAL N O T RA T ED 08-Apr-15 4.20 5.00 OUTPERFORM 19-Aug-15 3.00 5.10 30-Sep-15 3.69 5.30 26-Oct-15 4.09 5.70 * Asterisk signifies initiation or assumption of coverage.
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3-Year Price and Rating History for Haitian Flavouring & Food (603288.SS)
603288.SS Closing Price Target Price Date (Rmb) (Rmb) Rating 23-Jun-15 33.23 42.00 O * 14-Aug-15 34.04 41.20 22-Oct-15 35.99 41.00 * Asterisk signifies initiation or assumption of coverage.
OUTPERFORM
3-Year Price and Rating History for Han's Laser Technology Co., Ltd (002008.SZ)
002008.SZ Closing Price Target Price Date (Rmb) (Rmb) Rating 17-Aug-15 28.24 33.00 O * * Asterisk signifies initiation or assumption of coverage.
3-Year Price and Rating History for JD.com, Inc. (JD.OQ)
JD.OQ Closing Price Target Price Date (US$) (US$) Rating 30-Jan-15 24.84 35.00 O * 04-Mar-15 27.72 40.00 * Asterisk signifies initiation or assumption of coverage.
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3-Year Price and Rating History for Vipshop Holdings Limited (VIPS.N)
VIPS.N Closing Price Target Price Date (US$) (US$) Rating 26-Sep-13 5.80 6.00 N * 13-Nov-13 8.70 7.50 16-Jan-14 10.38 8.00 05-Mar-14 17.15 14.50 08-Apr-14 14.26 17.80 O 15-May-14 16.45 20.30 23-Jun-14 18.01 20.80 14-Aug-14 21.73 26.70 20-Nov-14 22.64 25.90 06-Jan-15 21.75 24.50 NEUTRAL OUTPERFORM 17-Feb-15 25.11 31.00 15-May-15 26.22 30.00 11-Aug-15 18.26 29.00 16-Sep-15 17.41 25.00 * Asterisk signifies initiation or assumption of coverage.
3-Year Price and Rating History for Wanda Cinema Line Co Ltd (002739.SZ)
002739.SZ Closing Price Target Price Date (Rmb) (Rmb) Rating 24-Sep-15 81.50 101.50 O * * Asterisk signifies initiation or assumption of coverage.
OUTPERFORM
3-Year Price and Rating History for Wisdom Holdings Group (1661.HK)
1661.HK Closing Price Target Price Date (HK$) (HK$) Rating 29-Sep-15 3.22 5.20 O * * Asterisk signifies initiation or assumption of coverage.
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and
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Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, wh ich was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.
Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.
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Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 59% (36% banking clients) Neutral/Hold* 26% (31% banking clients) Underperform/Sell* 13% (23% banking clients) Restricted 2% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.
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Price Target: (12 months) for 58.com Inc. (WUBA.N) Method: Our main valuation method to reach our US$66 target price for 58.com is discounted cash flow (DCF) based on long-term revenue growth of 15%, long-term operating margin of 24%, WACC of 12% and 3% terminal growth. Risk: Key risks that could impede achievement of our US$66.00 target price for 58.com Inc. include: potential anti-trust issues, timing of the merger, or uncertainty surrounding a deeper cooperation.
Price Target: (12 months) for Alibaba Group Holding Limited (BABA.N) Method: Our TP of US$98 (from US$95) is based on 10-year DCF with a ~20% growth rate over 2020-25, a WACC of 11% and a 3% terminal growth rate (unchanged). Our target price implies 33.2x CY16E and 25.7x CY17E diluted adjusted EPS.
Risk: Risks that could impede achievement of our US$98 target price for Alibaba Group Holding Limited include: (1) macro slowdown; (2) slower-than-expected category expansion (medical, O2O local services) due to execution or competition; (3) slower mobile traffic growth and monetisation; and (4) higher-than-expected investments in business initiatives.
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Price Target: (12 months) for Anta Sports Products Limited (2020.HK) Method: Our target price of HK$22.50 for Anta Sports Products Limited is based on a target price-to-earnings (P/E) multiple of 20x the estimated 2016 earnings per share (EPS), at a premium compared to its one-year historical average forward PE of 16x. We believe a higher multiple is justified given the company's leading position in China sportswear sector recovery, strong trade fair order value growth and solid sales momentum.
Risk: Risks that could impede achievement of our target price of HK$22.50 for Anta Sports Products Limited include fierce industry competition, slowdown in trade fair order value growth, channel inventory build-up at the retail level, higher wholesale discount, rising labour costs, and increasing advertising and promotion expenses.
Price Target: (12 months) for Beijing Enterprises Water Group Limited (0371.HK) Method: Our target price of HK$8.0/sh for Beijing Enterprises Water is based on DCF method with WACC of 8.5% and a terminal growth of 2%.
Risk: The key risks to our HK$8.0/sh target price for Beijing Enterprises Water are slower than expected plant upgrade, slower than expected pipeline connection, default from local government and M&A risk.
Price Target: (12 months) for CAR Inc. (0699.HK)
Method: Our target price of HK$22 for CAR Inc. implies 22x/17x 2016/17E P/E and 0.5x PEG (vs China budget hotels’ 19.3x 2016E P/E, catering’s 14.6x and China auto O2O’s 14.2x, all on consensus).
Risk: Risks that could impede achievement of our target price of HK$22 for CAR include: (1) direct and indirect competition; (2) capital requirement and high operating leverage; (3) restriction on car plates and auto purchase; (4) suspension of operational cars; and (5) disposal price of used cars.
Price Target: (12 months) for China Harmony New Energy Auto Holding Limited (3836.HK) Method: We derive our HK$8.80 target price for China Harmony New Energy Auto Holding Limited from a DCF (discounted cash flow)-based methodology, as simple multiples do not fully exhibit a dealer business's long-term earnings power (mainly from services) and Harmony's new endeavour in electric vehicle market. We apply a WACC (weighted average cost of capital) of 7.0% for our equity valuation. Key assumptions include an 5.6% cost of debt, a 3.5% risk free rate, 0.74 beta, a 25% income tax rate and an 47% equity-to-"equity+debt" ratio. Our target price implies 12.9x/11.7x 2016/17E P/E (price-to-earnings), a premium to other Chinese auto dealer peers. We believe the valuation premium is justified by company's higher long-term growth potential via penetrating into high growth EV segment.
Risk: Risks that could impede achievement of our target price of HK$8.80 for China Harmony New Energy Auto Holding Limited include: (1) Luxury car demand slowdown may ignite price wars and hurt dealers’ margins; (2) Company's EV development plan may be delayed if it fails in its application for a passenger vehicle production license; and (3) Intensified competition in independent service market may result in lower margin or sales growth of company's independent service business.
Price Target: (12 months) for China Intl’ Travel Service (601888.SS)
Method: Our Rmb68 target price for China Intl’ Travel Service is based on two valuation methods: (1) DCF (discounted cash flow) – capturing CITS' strong cash generation (RMB1-2bn each year) and rich cash position (10% of market cap), with beta of 1x and weighted average cost of capital of 8.1%; and (2) forward P/E (price-to-earnings) at 26.5x – 5-year mean. Our target price implies 38x 1-year forward P/E, which is just above A-share tourism peers at 37x forward (consensus) P/E. Risk: Risks that could impede achievement of our Rmb68 target price for China Intl’ Travel Service include: (1) Government cutting tariff/consumption tax: On 26-May-2015, Chinese government announced reduction of tariff for 4 categories: (i) skincare, (ii)diaper, (iii) cloth and (iv) shoes. This follows Premier Li Keqiang's speech on 28-April-2015 that Chinese government is considering reduction of tariff and consumption tax on certain popular categories. So far we haven't seen new announcement of the consumption tax but only the tariff. Tariff only plays a small part in the high retail price in China. If consumption tax further comes down, we foresee 1-40% deduction potential to the retail price on cosmetics, which might have an impact of the duty-free demand in China. However we believe so far there hasn't been the case that Chinese merchants conduct parallel imports from Sanya, given the quantity and value limits. Therefore we believe this will have an impact higher on the oversea duty-free stores than on CITS. (2) Tourist demand for Sanya: Sanya has enjoyed strong tourist demand in the past decade. CITS' duty-free sales has been equally driven by tourist volume, rising conversion rate, and rising per-head spend. We still foresee strong tourists demand of Sanya, supporting 10-15% tourist volume growth. Our forecast of Sanya sales is based on this 10-15% tourist volume growth, flat conversion rate, and 10-15% per-head spend. We believe this is a fair assumption. If Sanya tourist volume growth decelerates to 8%, we see 4-6% downside to our earnings forecasts. (3) M&A risk: Part of our investment thesis is that CITS would be the ideal vehicle for SOE reform. This suggests we do expect some M&A activities ahead, either in CITS, or in the parent group level. However the valuation/earnings impact will depend on what the target/strategic partner will be. However given CITS' strong cash generation and rich cash position, we believe further utilisation of excess cash is positive to the overall valuation.
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Price Target: (12 months) for Ctrip.com International, Ltd. (CTRP.OQ) Method: Our new TP of US$109.05 is based on an SOTP (sum-of-the-parts) valuation, in which we forecast core business of US$22 bn or US$97/share, and Ctrip’s 48% stakes in Qunar of US$12/share.
Risk: Risks to our price target of US$109.05 for Ctrip include: (1) ongoing soft macro-economic environment, (2) slower-than-expected leisure travel market; (3) a more intense competitive environment; (4) weaker-than-expected mobile Internet monetisation capability.
Price Target: (12 months) for Dongjiang Environmental Company Limited (0895.HK) Method: Our target price of HK$23/sh for Dongjiang Environmental Protection is based on a sum-of-the-parts method, using a 46x P/E (price to earnings per share) for HWT and 17x P/E for industrial recycling and 27x PE for industrial EPC for 2016E, and a DCF for municipal waste treatment with a WACC of 9% and a terminal growth rate of 0%.
Risk: The key risks to our HK$23/sh target price for Dongjiang Environmental Protection are falling commodity prices, delays in new capacity construction, and price cuts in industrial waste treatment.
Price Target: (12 months) for Geely Automobile Holdings Ltd (0175.HK) Method: We derive our HK$5.70 target price for Geely Automobile Holdings Ltd from a DCF (discounted cash flow)-based methodology, implying 10x 2016E P/E (price-to-earnings). In our DCF model, we apply a WACC (weighted average cost of capital) of 9.6% for our equity valuation. Key assumptions include a 6.8% cost of debt, a 3.54% risk free rate, 0.92 beta, a 19% income tax rate, and an 87% equity-to- equity+debt ratio.
Risk: Risks that could impede achievement of our HK$5.70 target price for Geely Automobile Holdings Ltd include the following: The major downside risk to our investment thesis are (i) weaker-than-expected sales in its "Borui" GC9 high-end sedan. (ii) potential foreign exchange loss due to negative foreign exchange movements.
Price Target: (12 months) for Haitian Flavouring & Food (603288.SS) Method: Our DCF-based TP of Rmb41.0for Haitian Flavouring & Food implies 36x 2016E PE and 1.7x PEG. As a leader in a favourable segment (strong consolidation potential/solid execution/motivated management/ high capital return), we believe it deserves a valuation premium.
Risk: Key risks to our target price of Rmb41.0for Haitian Flavouring & Food include: (1) food safety scandals; (2) raw material cost inflation; (3) slow consumption upgrade.
Price Target: (12 months) for Han's Laser Technology Co., Ltd (002008.SZ) Method: Our TP of Rmb33 for Han's Laser is backed by DCF, as we believe the methodology better captures the mid-term growth after its vertical integration expansion fully ramps up. We assume 8.7% cost of equity, 40% leverage, 1% terminal growth, and 20% terminal EBIT margin. Our target price of Rmb33 implies 37x 2016E P/E, about 1x standard deviation above historical average. We think HL should re-rate as (1) the low-power laser equipment business growth could supply on the upside thanks to better-than-expected Apple order, (2) it is expanding into the high-power equipment market which has higher potential than the low-power market, (3) its vertical integration will bring more recurring revenue and margin, if successfully executed. Risk: Risks to our TP of Rmb33 for Han's Laser include: (1) Delay of placement: We believe the placement projects are of strategic importance to HL and its margin improvement and growth may be unexciting if the placement was delayed. HL would use its own proceeds to fund the laser generator project, which could stretch its balance sheet. (2) Consumer electronic product cycle: More than 50% of HL's profit is still driven by low-power marking and carving equipment, which is widely used on consumer electronics. A slowdown of Apple's smart device sales and unsuccessful new products, for example, would negatively affect laser equipment purchase and HL's profitability and growth. (3) Global competition: We expect IPG to lower laser generator price in response to HL's vertical integration. This could affect HL's project return and reduce the laser equipment price on the market. (4) Technology complexity of high-power laser generator: HL may or may not be able to develop the high-power laser generators at reasonable quality and at competitive costs, due to the high technology entry barrier. (5) Currency risk: HL reports sales in CNY but has foreign currency procurement for its laser generator. Further CNY depreciation will negatively affect its earnings.
Price Target: (12 months) for JD.com, Inc. (JD.OQ) Method: Our DCF (discounted cash flow)-based target price of US$40 for JD.com, Inc. implies 1.3x 2016E P/S (price-to-sales). Key catalysts: (1) better control of product authenticity; (2) marketplace growth; (3) early breakeven; and (4) M&A. Risk: Risks that could impede achievement of our $40 target price for JD.com, Inc. include: (1) labour cost inflation; (2) execution in small cities; and (3) old share placement by pre-IPO investors.
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Price Target: (12 months) for Vipshop Holdings Limited (VIPS.N) Method: Our US$25 target price for Vipshop Holdings Limited is based on 30x 2016E P/E (price-to-earnings) on the back of 50% EPS (earnings per share) CAGR in the next 2 years, at a premium to other e-commerce and China internet names.
Risk: The risks that may impede achievement of our US$25 target price for Vipshop Holdings Limited include: (1) active customer growth slowdown, (2) increasing competition on suppliers and customers, and (3) further inventory improvement from suppliers.
Price Target: (12 months) for Wanda Cinema Line Co Ltd (002739.SZ) Method: We forecast Wanda's earnings to grow at a 64% CAGR for 2015-17 and assign a DCF (discounted cash flow)-based target price of Rmb122, assuming an 8.9% WACC (weighted average cost of capital) and 2.5% terminal growth; the valuation also implies 62x/41x FY16/17E P/E (price-to-earnings).
Risk: Risks that could impede achievement of our Rmb122 target price for Wanda Cinema Line Co Ltd include: (1) shift in consumer behaviour from watching movies, (2) slowdown in box office growth, (3) oversupply of theatre/screen over the long term, and (4) competition from online cinemas (eg. Alibaba).
Price Target: (12 months) for Wisdom Holdings Group (1661.HK) Method: Our HK$5.20 target price for Wisdom Holdings Group is based on 16x/13x FY16/17E EPS, which is a 45% discount of A/H-share sports and broadcast average.
Risk: Key downside risks to our HK$5.20 target price for Wisdom Holdings Group include: (1) sports revenue growth is less than 40-50%; and (2) the ads revenue decline rate widens.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names The subject company (002739.SZ, 0699.HK, 3836.HK, BABA.N, CTRP.OQ, WUBA.N, 0371.HK) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (002739.SZ, 0699.HK, 3836.HK, BABA.N, WUBA.N, 0371.HK) within the past 12 months. Credit Suisse has managed or co-managed a public offering of securities for the subject company (002739.SZ, 0699.HK, 3836.HK, BABA.N, WUBA.N) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (002739.SZ, 0699.HK, 3836.HK, BABA.N, WUBA.N, 0371.HK) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (002008.SZ, 002739.SZ, 0175.HK, 0699.HK, 3836.HK, BABA.N, CTRP.OQ, JD.OQ, WUBA.N, 0371.HK, 601888.SS) within the next 3 months. Credit Suisse has a material conflict of interest with the subject company (BABA.N) . Credit Suisse acted as the exclusive financial advisor to Alibaba Group in relation to its investment in Snapdeal.com. Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit- suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (002739.SZ, 0699.HK, 3836.HK, BABA.N, WUBA.N) within the past 3 years. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.
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To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse (Hong Kong) LimitedVincent Chan ; Dick Wei ; Evan Zhou ; Anson Huang ; Steven Zhu ; David Hao ; Bin Wang ; Mark Mao ; Trina Chen ; Baiding Rong ; Sam Li ; Sophie Chiu ; Kevin Yin, Joy Zhang, Kyna Wong
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